By Liz Weston
LOS ANGELES, March 3 Getting student loan debt
erased in bankruptcy court isn't easy, but it's possible.
Unfortunately, most borrowers can't afford the fight that might
give them some relief.
"You'd need to spend at least $5,000," said Henry Sommer,
supervising attorney at Consumer Bankruptcy Assistance Project
in Philadelphia and a former president of the National
Association of Consumer Bankruptcy Attorneys. The catch is that
"if you had $5,000, you would not be eligible for a student loan
discharge," Sommer added.
Several recent court decisions have challenged the notion
that only the worst-off borrowers, typically those who are
permanently disabled, can get education debt erased. The
borrowers who won these discharges had low costs, either
receiving free legal help or representing themselves.
In most cases, borrowers in bankruptcy don't even ask for
help because they figure a discharge of debt is so rare. In one
study of 170,000 student loan debtors who filed for bankruptcy
protection in 2007, only 51 won full discharges of their debt
and 30 received partial discharges.
The author of the study, which was published in the American
Bankruptcy Law Journal, found that only 213 of the student loan
debtors studied even tried to have their education debt
discharged by filing what's known as an "adversary proceeding."
Since bankruptcy law doesn't allow student loans to be erased in
a regular filing, this extra step is necessary before education
debt can be discharged.
Of those who tried to get their student debt wiped out, in
other words, two out of five got at least some relief. Based on
the characteristics of those who were able to get discharges,
researcher Jason Iuliano calculated that an additional 69,000
people who filed bankruptcy that year would have had a "good
chance" of erasing their student loans had they filed adversary
Iuliano speculated that one reason so few student loan
borrowers seek relief is that they've been convinced it's
hopeless. He cited academic journals and numerous popular press
articles indicating such discharges are almost impossible.
Debtors are sometimes told that absent a total and permanent
disability, they can't get their loans discharged.
There may be another reason. People who file for bankruptcy
are, not surprisingly, usually broke. Paying attorneys' fees can
be a stretch, and attorneys may be loathe to make the extra
effort required knowing they might not be paid for it.
"Most [bankruptcy attorneys] don't attempt an undue hardship
discharge because it requires an adversarial proceeding, which
is a lot more work," said Mark Kantrowitz, a student aid expert
and publisher of Edvisors Network Inc.
Iuliano's research showed that those who represented
themselves were about as likely as those who had lawyers to win
their cases. Bankruptcy attorney Sommer said few borrowers are
prepared to argue their cases in court against skilled and often
aggressive lawyers representing their creditors.
"Most people are not capable of doing that," Sommer said.
"This is full-scale litigation."
The bar is certainly high. A borrower has to prove that
repaying his or her student loans would be an "undue hardship."
Typically, that means meeting three tests: a current inability
to pay the loans, because doing so wouldn't allow you to
maintain a minimal standard of living given your current income
and expenses; a future inability to repay the money, because
your financial situation is likely to continue; and a good-faith
effort to repay what you owe.
In two recent decisions, though, courts granted relief to
borrowers who hadn't made voluntary payments on their debt and
who refused to enroll in income-based repayment plans. The
appeals court judges in both cases said enrolling would have
been pointless given the women's tiny incomes.
In a third case, the borrower was both employed and healthy,
but wage garnishments by his student lenders left him unable to
support his wife and two children.
Michael Hedlund was twice granted relief in bankruptcy
court, but his lenders challenged the decisions both times, said
Derek Foran, a partner with San Francisco-based Morrison &
Foerster Foran, who along with attorney Yonatan Braude
represented Hedlund for free in those appeals. The court battles
ultimately resulted in a decision by the U.S. 9th Circuit Court
of Appeals that upheld Hedlund's bankruptcy relief. That will
make it harder for lenders to undermine bankruptcy court
decisions in Western states in the future, Foran said.
"The problem is that the creditors have vast resources
they don't see any downside to trying to get the decisions
reversed on appeal," Foran said. "We like to feel we made the
system a little fairer for debtors in the 9th district."