Former students saddled with student loan debt are starting to win arguments in bankruptcy court that allow them to discharge that debt.
“Borrowers are beginning to win battles to erase some student loans in bankruptcy court,” as Sarah Chaney reports for the Wall Street Journal, “overcoming stiff obstacles that have generally blocked that path except in extreme cases of financial hardship.”
It boils down to the “educational benefit” language.
Infamously, current bankruptcy law only allows for discharge of student loan debt if the debtor proves “extreme hardship,” which is typically a huge burden of proof. In other words, most people cannot discharge their student loans in bankruptcy, in a market with more than $1 trillion in student loan debt.
This wasn’t always the case. Changes to the Bankruptcy Code, however, most recently through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, tightened the law in opposition to debtors (contrary to the “consumer protection” language in the title).
But the Bankruptcy Code specifies that debtors cannot discharge student loans that they received for an “educational benefit.” This language, as Chaney characterizes it, opens the window to arguments that some student loans fall outside of the law’s requirements.
Bar exam prep, medical school debt, etc.
A judge in Brooklyn recently ruled that debt incurred (a Citibank loan) to study for the bar exam wasn’t student loan debt, but in fact consumer debt, dischargeable in bankruptcy.
In another case, student loans taken out to attend a medical school (in Senegal) that falsely claimed to be accredited, and in fact wasn’t, were ruled to be dischargeable.
These are just two cases referenced by the WSJ, but they highlight a movement that seems to be growing.
“Bankruptcies in and of themselves are on the decline,” said one lawyer, as quoted by the WSJ. “That may change if more and more people and bankruptcy lawyers get informed there are provisions in the bankruptcy code to manage student loans.”
Bankruptcy Becomes an Option for Some Borrowers Burdened by Student Loans