Can Bankruptcy Eliminate Student Loans

Imagine No Debt

The Federal Reserve released a report last year that that college student debt was estimated to have risen to $966 billion in the year 2012. More than 2/3 of that debt is being carried by debtors who are less than 40 years old. The report also stated that 17% of those debtors are delinquent on their loans at least 90 days. Student loans passed credit card debt in 2010 becoming the 2nd largest household debt, with mortgages being the first. According to the Consumer Financial Protection Bureau, student debt has risen 20% since 2012 to a staggering $1.2 trillion.
Student Debt and Bankruptcy Law

Even though student debt is big and getting bigger by the year, it is generally not wiped out with bankruptcy. Many consumers believe that part of the bankruptcy code needs to be changed.

Some senators, including Elizabeth Warren and Dick Durbin, are putting their power behind this issue. President Obama recently revealed a proposal that would ease the restrictions on trying to get relief of private college loans with bankruptcy. Unfortunately, private loans only count for 10% of the total. The other 90% is backed by the United States government.

The United States is on track to forgive the billions of dollars in federal student loans through repayment plans. This is raising concerns about what it will cost the American taxpayers, especially if the loans become less difficult to discharge through bankruptcy.

With a big slice of the delinquent loans coming from for-profit schools, several of which have been accused of less than good behavior, senators have asked the U.S. Department of Education to examine the possibility of a new path that would provide federal loan forgiveness for some students.
College Tuition Lawsuits

Trustees are now suing colleges, and even some college students, to get back tuition that was paid years ago. This is a growing legal move that is very aggressive. Parents who file for bankruptcy after they have paid the growing cost of college loans are facing scrutiny from Trustees appointed by the court. The Trustees have argued that the money should have been spent on their personal debts, according to a report from The Wall Street Journal.

Lawsuits for recovering tuition are relatively new. It used to be that tuition payments were so small that the Trustee wouldn’t bother pursuing them. However, with the cost of college rising quickly and parents trying to help their kids, bankruptcy pros say that more lawsuits are coming. According to a report released by SLM Corp, the largest private student loan company, 48% of parents with kids under the age of 18 are already saving for college. On average, these families have around $10,000 saved for college.

Trustees appointed by the court have the job of recovering as much money as they can to repay creditors. They are able to look for improper payments that were made 4-6 years before a bankruptcy in many states. Under the bankruptcy code, a Trustee can sue to get back the money that a bankrupt individual used years ago to file for bankruptcy protection if the Trustee can find that they did not get a “reasonably equivalent value” for that expense. However, the law does not have a definition for “reasonably equivalent value.”

The Trustees are paid a small set fee and a percentage of what they recover. In 2013, Trustees recovered over $3 million from Chapter 7 filings. (That is the latest figure available from the U. S. Department of Justice.) Bankruptcy judges have not often been asked to rule if these lawsuits are fair or not because most of the cases are settled. Colleges and universities are not at all happy with this trend.

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