The Minneapolis Star Tribune recently ran an opinion piece stating that bankruptcy is a natural solution to the student debt crisis.
At Walker & Walker, we completely agree! and that isn’t just because we are bankruptcy lawyers. Bankruptcy has long been a special piece of the American Financial and Legal system that keeps borrowers and lenders honest. If loans cannot be discharged in bankruptcy, then lenders will inevitably lend too much money at too high an interest rate and the American people will suffer. This is what we are seeing with student loans.
Bankruptcy s a great mechanism for separating people who can afford to pay debts because they have lots of income and assets from people who can’t. Our courts have over a century of experience in making sure that borrowers and lenders get treated with compassion and fairness, and the legal process itself is easy for all parties. Bankruptcies don’t get tied up in court for years, they are decided quickly and with transparency.
Who better than the bankruptcy courts to decide who can afford to pay on their student loans and who can’t? Certainly the courts, which look at everyone’s financial situation independently can do a better job than an act of Congress.
HOW DOES BANKRUPTCY KEEP BORROWERS HONEST?
Bankruptcy keeps borrowers honest because they only get a discharge of their debts if they tell the court about everything they own, all of the money they make, and all of the debts they have. When getting your debts discharged in bankruptcy, the court and the trustees are careful to make sure that everyone is treated fairly. The debtor is left with enough to live a normal middle class lifestyle. This includes car, house, retirement accounts, and household goods, but can’t keep things like vacation homes or collector cars.
If the borrower makes more money than a typical household in the state where they live, then that borrower can only file for Chapter 13 bankruptcy and must pay back a portion of their student loans. If they make less than a typical household, then they can file under either chapter 7 or chapter 13 and don’t need to make a payment plan towards the debts.
The chapter 13 payment plan is designed to be affordable. The debtor makes a budget with their attorney and then pays whatever the budget shows they can afford for 5 years. 5 years is actually quite short when one considers that student loans often go on for 25 years and credit card debt can also last 15 years if the borrower is only paying the minimum payments.
HOW DOES BANKRUPTCY KEEP LENDERS HONEST?
This line of reasoning is a bit harder to follow, but still important. If there is a possibility that a loan won’t get paid back, then the lender will be extra careful to lend smaller amounts of money and only to people who might pay it back. If student loans are smaller and more selective, then schools no longer have the power to charge high tuition. At present schools have been raising their tuition rates far faster than inflation for decades and then forcing students to take student loans to pay for it. Where does the extra tuition money get spent? The author isn’t sure, but I often see unnecessary marketing campaigns and construction being done at schools, and can only assume that there are ways to control costs that the schools are not using.
If students weren’t able to borrow so much money for school, then tuition would cost less. Maybe some new stadiums don’t get built and some renovations on the dorm rooms get delayed, but I suspect that the students would still get a good education. The education itself it the goal of college, so the student will finish with less debt and be better able to get started in life.
If student loans were dischargeable in bankruptcy, then lenders would be careful only to approve students who were going to schools that educated the student well enough to earn a living. As a bankruptcy lawyer, I regularly meet with people who owe tens of thousands of dollars in student loans that got spent at a for profit college that didn’t lead to any gainful employment. Right now, we can help them discharge credit cards and medical bills, which allows them to focus future payments on the student loans, but that is only a half solution, and probably feels unfair to the credit card companies and to the medical companies.
Before the 90s, student loans were dischargeable if the borrower had made payments on them for 5 years. I think we should return to that rule where people who paid their student loans for a time could discharge them, or perhaps they could be dischargeable in chapter 13.
Americans are hard working and they want to pay for their education. Most of them do, but having a way for those who can’t afford to pay for it can get it legally forgiven makes all the sense in the world.
Want to know more about how student loans work in bankruptcy in Minnesota? Why not visit our list of articles written by attorneys for people who aren’t attorneys in the Walker & Walker learning center.