Law Review: Taylor, Aaron & Sheffner, Daniel – Oh, What a Relief It (Sometimes) Is: An Analysis of Chapter 7 Bankruptcy Petitions to Discharge Student Loans
Conventional wisdom dictates that it is all-but-impossible to discharge student loans in bankruptcy. This contention, however, misstates the fact that bankruptcy discharge of student loans is possible—and it happens. This Article presents a statistical analysis of what happened when Chapter 7 bankruptcy petitioners in the First and Third federal judicial circuits filed 523(a)(8) adversary proceedings—or proceedings to discharge their student loan debt due to an “undue hardship.” In our analysis, we found undue hardship discharge rates of 54% in the First Circuit and 24% in the Third Circuit. But more significantly, we found that undue hardship determinations were relatively rare. A plurality of cases was dismissed at the debtors’ behest. The next most common resolution was settlements between debtors and creditors. And when all forms of resolution were considered, 51% of First Circuit debtors and 46% of Third Circuit debtors who sought discharge of their student loans obtained some form of relief—either an undue hardship discharge, a settlement, or a default judgment. These rates, while not representing certainty, surely do not reflect the near-impossibility of relief that is often assumed when student loans are discussed in the context of bankruptcy.
While encouraging that there is some sort of favorable resolution for debtors in roughly half the undue hardship cases brought, this number is subject to a self-selection bias. The authors recognize this writing that “it is possible that only the most compelling debtors are pursuing discharge, while others with weaker claims are being counseled out of the endeavor”, p. 298, but then minimize this as a “discouraging effect” due to “exaggerated feelings” of hopelessness.
With approximately 18% of the adult population of the U.S. having some student loans there is no reason to believe that the percentage is not higher for debtors that file bankruptcy. The authors’ finding that only 1 in 1000 Chapter 7 debtors even attempt to have student loans discharged, shows that there is a gaping chasm between the number of debtors with student loans and those that even try to eliminate them.
To ascribe this discrepancy to “exaggerated feelings” is to ignore the real questions of why there are not more attempts at discharge. The findings in this paper that representation by counsel is one of the crucial predictors of a beneficial resolution for debtors, points one answer, specifically how those attorneys were paid for their representation. As attorneys’ fees, both already paid and amounts still owed, as well as the source of those funds, in bankruptcy cases are required to be disclosed to the court, this would seem to be an easily obtainable data point that could be used for analysis.
This is the “dirty secret” of the student loan defense, whether by the government, its servicers or private student lenders- amplifying the “discouraging effect” of unlikely discharge to the cost of full-scale scorched earth litigation with a debtor that (almost by definition and statutory requirement) cannot afford to pay a lawyer. This is perhaps the best explanation for why debtor’s attorneys that are willing to fight tooth and nail with even the biggest mortgage banks shy away from student loan discharges. In the former, there are often fee-shifting statutes, so victory results in the bank paying the debtor’s attorney’s fees or at the very least leave a debtor with monies freed from their housing expenses. Absent the most egregious failure to consent to discharge, success in eliminating student loans through bankruptcy does not require the lender to pay anything to the victors, but often leaves the debtor still without extra money to pay lawyers.
For a copy of the paper, please see: