Student loan debt is among the largest financial burdens Americans face, with many estimates placing the total amount of debt at more than $1 trillion. Bankruptcy law, unfortunately, only offers limited relief. Since 2005, nearly all student loans are excepted from discharge in bankruptcy cases, except in very limited circumstances. Many debtors must consider other options in addition to bankruptcy if their student debt becomes overwhelming. A series of debt relief measures recently announced by the federal Department of Education (DOE) may offer relief to some debtors. One can hope that the DOE’s actions also offer hope for additional reforms in the future.
The Bankruptcy Code identifies certain debts that are not dischargeable in bankruptcy. 11 U.S.C. § 523. These exceptions could be broadly categorized as (1) debts owed to the government or subject to a court order, such as certain tax debts or child support obligations; and (2) debts incurred through some fault of the debtor, such as those arising from civil judgments for fraud or other injury.
Student loans do not quite fit into either category. Prior to 2005, the only student loans excepted from discharge were those “made, insured or guaranteed by a governmental unit,” or made by an organization that receives government funding. 11 U.S.C. § 523(a)(8) (2004). The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, amended that section to include private student loans as well.
Another notable feature of the Bankruptcy Code’s exceptions to discharge is that, while they include multiple mechanisms by which a debtor’s bad behavior could affect their bankruptcy case, they do not expressly take the misbehavior of a creditor into account. The analysis focuses almost exclusively on the debtor. In order to discharge student loan debt, a debtor must prove that they will experience “undue hardship,” as narrowly defined by various court decisions, if they are forced to continue to repay the loans. The DOE’s recent debt relief measures are based on alleged misconduct by a creditor.
In April 2015, attorneys general from nine U.S. states, including California, sent a letter to DOE Secretary Arne Duncan asking him to offer loan forgiveness to students who enrolled at for-profit schools and colleges operated by Corinthian Colleges, Inc. While this company is not the only for-profit education company accused of predatory student loan programs, it is perhaps the most well-known.
The California-based company, which ceased operations in April 2015, once operated over 100 campuses around the country under the names Everest, Heald, and WyoTech. The DOE fined the company $30 million the same month. Multiple states are still investigating the company, and a lawsuit filed by the federal government is still pending.
The DOE’s plan offers relief to about 15,000 students who enrolled at Corinthian schools and took out $208 million in loans. The students will have expanded eligibility to apply for closed school discharges. The DOE is also streamlining procedures for borrower defense relief, which allows a debtor to object to the repayment of a student loan based on a school’s alleged misconduct. The DOE’s plan is far from perfect, but it could offer substantial relief to thousands of people.
For the past 20 years, bankruptcy attorney Devin Sawdayi has helped individuals and families in the Los Angeles area get a fresh start by restructuring or discharging their debts through Chapter 7 and Chapter 13 bankruptcies. We are committed to representing our clients with respect and dignity, with a focus on each client’s unique circumstances. To schedule a free and confidential consultation, contact us today online or at (310) 475-9399.
More Blog Posts:
Ninth Circuit Affirms Partial Discharge of Student Loan Debt in Chapter 13 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, April 9, 2015
White House Takes Action on Student Loans; Executive Order Does Not Affect Nondischargeability of Student Loans in Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, October 14, 2014
Proposed Legislation Could Reduce Student Loan Interest Rates; Still Doesn’t Address Discharge in Bankruptcy or Cost of Education, Los Angeles Bankruptcy Lawyer Blawg, August 15, 2014