Unlock the Debtor Jail for Student Loans

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Earlier this year, a judge denounced the myth that student loans cannot be cleared in bankruptcy court when she excused a Navy veteran from paying $ 221,000 in educational debt. Bankruptcy judge Cecelia G. Morris’s decision generated much headlines and speculation that the ruling might facilitate such layoffs.

The fight is not over yet, however. A few days later, Education Credit Management Corporation, a not-for-profit that guarantees and services government student loans for the US Department of Education, appealed Morris’s ruling.

The reality is that Cancel student loans in the event of bankruptcywhile technically possible, is so laborious and expensive that few try; even less successful. Without Congressional intervention and a change of heart at the Department of Education, borrowers in trouble will continue to be trapped in a virtual debtor prison: unable to pay their debts and not get on with their lives.

Tax money is also wasted. ECMC has a long history of aggressively resisting student loan relief, even when there is little hope of getting money back. Among other things, the ECMC has notoriously fought against bankruptcy relief for a woman diagnosed with pancreatic cancer; a formerly homeless woman with mental illness who is living on social security benefits for disability; and in the case of Navy vet Kevin Rosenberg, who was the subject of the Morris judgment, a man whose basic living costs exceeded his income.

Of course, getting rid of student loan debt should never be easy. But it should never have been so difficult to get rid of priceless educational debts.

This was the consensus of a group of experts made up of bankruptcy judges, lawyers and academics who have studied the issue and published their recommendations over the past year. The American Bankruptcy Institute Consumer Bankruptcy Commission proposed changes judges could make to help more borrowers, but real reform will require new laws and a more sensible, cost-effective approach from the Department of Education.

Regarding the recommendations of the Commission:

Allow private student loans to be deleted

Federal student loans are backed by tax dollars, so it makes sense that they are harder to pay off than credit card debt or medical bills. But Congress extended the same status private student loan in 2005. Unlike federal student loans, private student loans are borrowed, which means that lenders assess borrowers’ repayment ability, calculate interest rates that reflect the risk of default, and often require co-signers to guarantee repayment. Shielding personal student loans from bankruptcy courts can protect lenders’ profits, but it’s hard to argue that it is somehow in the best interests of taxpayers. The commission recommends that Congress amend the law to make it easier to delete private student loans, as well as loans from parents and other relatives for their children.

The seven-year standard is to be restored

In 1976, Congress decided that overwhelmed borrowers could pay off their student loans five years after the first bankruptcy payment was due. Debtors could get relief earlier if the repayment was “undue hardship”. In 1990, Congress extended the waiting period to seven years.

In the meantime, courts tightened the rules of what “unreasonable hardship” means – with the stipulation that those who could not prove undue hardship could have paid their debts within a few years. In 1998, however, Congress removed the time element entirely. Now borrowers are being held to the strict standards the courts had developed under previous laws, but with no promise of eventual discharge.

The commission recommends reverting to the seven-year standard, pointing out that if borrowers were still in trouble at that point, their circumstances would likely not improve enough to repay a significant portion of their loans. On the flip side, the elimination of debt could enable people to buy houses, raise families, start businesses, and otherwise engage in productive activities that add to the tax base.

Call the dogs

The Commission condemned “costly and inefficient litigation” and found that the Department of Education and the ECMC regularly tackle layoffs, regardless of cost or benefit.

Instead, the commission recommended that the department adopt well-defined rules that would prevent student borrowers from opposing layoffs for those on social security disability benefits, veterans’ affairs, or those whose incomes are less than 175% of the federal poverty line. In other cases, the collectors would have to carry out a cost-benefit analysis to avoid wasting government money.

“That doesn’t mean we’re telling the department to just pay off all student loan debt,” said William Houston Brown, a retired bankruptcy judge who co-chaired the commission. “Just don’t spend the money on litigation that is pointless.”

This article was written by NerdWallet and originally published by the Associated Press.

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