There is a proposed bill in Congress to get rid of the “undue hardship” test for Student Loans to be discharged in bankruptcy.
The Student Borrower Bankruptcy Relief Act of 2019 was introduced last month and spearheaded by the National Association of Consumer Bankruptcy Attorneys and Congresspeople John Delaney (D-MD) and John Katko (R-NY). Walker & Walker Law Offices knows that Minnesotans who file bankruptcy are not abusing the system, and that the people who do file, only do it because they really need financial relief. Why not include student loans in that financial relief? It is now common knowledge that they are seriously undermining the financial futures of many Minnesotans.
According to the Chicago Sun Times, this bill is gaining traction in Congress. We want to ask where are the Minnesota Legislators on this? Do you support student loan discharge in bankruptcy, or are you against it?
Most people who file for bankruptcy do it because they do no have enough income and assets to pay their debts. Overwhelmingly my clients say that bankruptcy was their last resort. They wish that they could have paid more on their bills and have usually put off things like saving for retirement or helping their children get an education so that they can pay more on their debts.
One of the fastest growing type of client that I see is retired people on a fixed income who still owe student loans. Sometimes these are loans for the retirees who went back to school after a job loss in the great recession, sometimes they are student loans that have been around for decades. Sometimes they are PLUS loans, or private student loans that the retiree took on for a child or grandchild. Whatever the reasons for these loans, they are particularly devastating for people who depend on Social Security because they can take 15% of Social Security Benefits every month.
Maybe the bill is overreaching because it treats student loans like credit cards and allows them to be discharged for anyone, unless they were taken in bad faith. A compromise solution would be to allow them to be discharged for people on a fixed income, or people who complete a chapter 13 partial debt repayment plan.
HOW DO STUDENT LOANS WORK IN BANKRUPTCY IN MINNESOTA?
Under the present law, the burden of proof in Minnesota is on the person filing bankruptcy to prove by “a totality of the circumstances” that the student loans are an undue hardship to the debtor and his or her dependents. This standard is more difficult than the law in other states. There have been entire books written on the subject, but in a sentence, the debtor must prove that the student loans prevent him or her from even the most minimal standard of living, and that the debtor will have no way of changing this in the future.
The Department of Education also has a policy of fighting every student loan case so that the attorney’s fees to even attempt a student loan discharge are unaffordable for the people who need it the most. The number of attorney and paralegal hours to have a trial to attempt to discharge student loans is often 5 to 10 times as many hours as to prepare, file, and succeed in the underlying bankruptcy case itself. There is no trial (called an evidentiary hearing) at all in a typical bankruptcy filing, but there is one if you attempt to discharge student loans.
Walker & Walker almost never agrees to take these cases for people because the attorney’s fees must be high because of the necessary number of hours of work to have any chance of success. There is also no guarantee of success, and it is very possible to do everything right, but still lose the case. This is an EVEN GREATER HARDSHIP on the person with student loans because they still have the loans, but also had to spend lots of money on pointless litigation.
The reason that the test for student loan discharge in bankruptcy was so difficult is that when it was introduced, it was actually a test for discharging student loans EARLY. Prior to 1990, anyone who had been paying their student loans for 5 years could discharge them in bankruptcy. If you could prove that the loans were an undue hardship, then they could be discharged with fewer than 5 years of repayment history. In 1990 Congress removed the 5-year rule, but kept the undue hardship rule.