President Barack Obama signs a Student Aid Bill of Rights in the Oval Office of the White House in Washington, D.C., March 10, 2015.European Pressphoto Agency
The White House is exploring whether to make it easier for Americans to get rid of student loans through bankruptcy, joining consumer advocate groups and federal lawmakers who’ve been pushing for that type of investigation for years.
“We’re glad they’re making this a priority and hope Congress does also,” said Ed Boltz, a North Carolina bankruptcy lawyer who is president of the National Association of Consumer Bankruptcy Attorneys.
The trade group has been pushing political leaders to relax bankruptcy rules so easier for borrowers to discharge their student loans. In a February 2012 member survey, 82% of respondents said the difficulty in discharging student debt in bankruptcy was “a big problem” preventing their clients from getting a fresh start.
Federal law prohibits bankruptcy judges from wiping out student loans, whether private or federal, except in rare cases of extreme financial hardship. Other forms of consumer credit such as mortgages, credit-card balances and auto loans face looser requirements for being discharged in bankruptcy.
The amount of student-loan debt that people have when they file for bankruptcy protection is steadily growing. Student-loan borrowers who filed for bankruptcy in 2013 had an average of $32,096 in student loan debt compared with student loan borrowers who filed in 2006 with an average of $13,456, according to figures kept by Northeastern University professor Daniel Austin.
Fewer than 1,000 people try to get rid of their student loans every year using bankruptcy.
Bankruptcy experts say that attempting to discharge the loans in bankruptcy is both expensive and uncertain. The process involves filing a lawsuit in federal court, and lawyers typically charge several thousand dollars upfront for that work.
“You either do it for free, or if you are able to have a client who can pay…it gets used against them in the discharge process,” Mr. Boltz said. “The student-loan attorney uses the argument that if you have $5,000 to pay your attorney for this, why didn’t you just pay your student loans?”
Many bankruptcy lawyers say they are hesitant to take on these cases because of the wide range of rulings that judges have handed down. In court, lawyers for a bankrupt student-loan borrower have to convince the judge that the borrower faces “undue hardship”—a term that Congress never defined. As part of the three-part test that most bankruptcy judges use to establish undue hardship, the borrower has to prove that they will never be able to afford their monthly payments—a difficult case to make.
Last year, a pack of U.S. senators including Dick Durbin of Illinois and Elizabeth Warren of Massachusetts urged the Department of Education to establish clear standardsfor when the agency’s contracted lawyers should contest claims of undue hardship by student borrowers.