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Narrow bankruptcy laws make it nearly impossible to discharge student debt
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Narrow bankruptcy laws make it nearly impossible to discharge student debt

From the The Cost of Opportunity: A series chronicling the student loan debt crisis in Wisconsin series
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Laurie Bigsby didn’t plan on becoming an attorney who represents student loan debtors in court.

She originally went into family and insurance law. But as more people have taken on debt for college and struggle to pay it back, Bigsby, based in Brookfield, is helping families navigate a complicated student loan system and a patchwork of legal rules to get bankruptcy relief.

“I have to focus more on the student loan thing because it’s preventing my son’s generation from going forward,” said Bigsby, who has been practicing law since 1988. “I’ve seen horror stories. It’s pretty frightening. It seems like people lose their perspective on letting their kids borrow.”

There are 44 million people in the United States who owe more than $1.45 trillion in student loans from private and public lenders, according to figures from the federal government. Of those borrowers, 4.3 million of them are in default. Bigsby works at the intersection of several trends that have grown over the last decade: as federal bankruptcy laws have tightened, lending for college through the federal government and private banks has increased rapidly, making it nearly impossible for student debt to be discharged like other forms of debt.

The dynamic has created a small but growing niche in the legal field as attorneys see increased demand from borrowers — from students and recent graduates in their 20s to parents in their 60s and 70s — who have fallen far behind on payments and are looking for help. The Cap Times asked Bigsby for clients who would be willing to share their stories, but she was unable to provide one.

There are about five to 10 attorneys that do student loan work in Wisconsin, Bigsby said. She wishes there were more so they could share information and help students and their parents. She said she is a part of a loosely organized national network of attorneys who share notes on what they’re seeing in their federal court district, where the cases are handled.

“It would help if more attorneys got more knowledgeable about it,” Bigsby said. “If more people were looking into the facts of the loans, then they could do a better job for their clients.”

Bigsby’s work as a student loan defense attorney means she defends borrowers who are being chased by creditors, either private banks or the federal government. With private lenders, Bigsby works out payment plans and attempts to negotiate better terms for her clients. With the government, there’s less one can do.

“You don’t want a judgement against you. It can follow you for a long time,” she said. “We’re trying to settle them and get them in payment arrangements they can live with.”

Bigsby often focuses on cases where a student took on debt to attend a non-traditional educational program like culinary or cosmetology school.

Because those programs are different than traditional four- and two-year colleges, it is unclear whether bankruptcy laws apply to them in the same way they do for traditional student loans. Those loans are distributed directly through the financial aid offices at traditional colleges and universities.

Students who attend non-traditional programs will sometimes take out non-qualified educational loans. These kinds of personal loans are not made through the federal government, but from private lenders who often do not certify the loan through a school or verify that the borrower is a student there. Bigsby traces the original paperwork of such loans, which lenders can struggle to produce, as loans have been sold from institution to institution.

In court, she pushes for creditors to produce those original documents rather than photocopies, which creditors often rebuff, she said.

“The problem is the chain,” she said. “Depending on who or what or where you got the loan, you get a photocopy, not the original note,” she said. Then it’s a matter of how courts in each state deals with it.

“I’ve had parents say, ‘I didn’t sign for that in the third and fourth years.’ People don’t seem to remember what they did on financial aid to begin with.”

Attorney Adam Minsky does similar work for clients on the east coast. Minsky, who is based in Boston, started a practice focused solely on student loan issues because of his struggle getting help with his loans. He said he sees consistent demand for his services, which range from default and collections cases, wage garnishment or erroneous credit reporting. Client ages also vary widely.

“People assume my average client is a 22 year old, but it really runs the gamut of age ranges,” he said. “Everybody likes to talk about irresponsible millennials, but it’s far more complicated than that and I think a lot of people don’t realize that.”

A series of incremental changes to federal bankruptcy laws over the past several decades have made it nearly impossible for those with student debt to get bankruptcy protection. Here is how it evolved:

  • In 1978, the Bankruptcy Reform Act barred federally-backed student loan borrowers from trying to discharge their loans in bankruptcy without showing undue hardship, until at least five years after graduation.
  • In 1984, Congress exempted student loan borrowers who borrowed from nonprofits and private institutions from seeking bankruptcy relief.
  • In 1990, the law was narrowed further, increasing the waiting period one could file for bankruptcy for federally-backed loans to seven years after graduation.
  • In 1996, the Debt Collection Improvement Act allowed the federal government to take a borrower’s Social Security benefits if loans were not being repaid.
  • In 1998, the seven year limit on filing for bankruptcy that was enacted in 1990 was eliminated.
  • In 2005, the Bankruptcy Reform Act made it so that no student loan — federal or private — qualified for bankruptcy unless the borrower could show “undue hardship” in making payments.

The original premise for narrowing bankruptcy laws regarding student loans came from a valid place of caution, said Megan McDermott, a lecturer on bankruptcy law at the University of Wisconsin Law School and a former federal attorney who represented the U.S. Department of Education, where she worked on student lending issues. She is still paying back her own student loans and is on a 30-year repayment plan, she said.

“There was demonstrated history of Congress saying consumers are abusing the bankruptcy discharge and we need to clamp down on it,” McDermott said. “Many of the changes to bankruptcy law over the years has been driven by fear of abuse and it’s not always clear that there’s evidence behind those fears.

“We don’t want people going to med school and incurring hundreds of thousands of dollars of debt and discharging it during their residency when they’re making no money.”

Now, the initial bankruptcy limits have been broadened so much, it has created other concerns for borrowers, she said.

Student loan debt is treated differently in bankruptcy court because it is issued more freely and under different circumstances than other forms of consumer debt, like credit cards or business loans, McDermott said.

Critics of the federal student loan system often point out how student debt gets special, unfair treatment. McDermott said that’s not really the case.

“The very nature of student loans is that lenders don’t ask how you are going to make this degree help you pay back the loans,” she said.

Though she is not aware of any of her law students interested in pursuing student loan defense work specifically, McDermott said she has seen an uptick in researching the issue generally.

“It is an issue that is intriguing to students just because it’s relatable, because a lot of them have high student loan debt themselves,” she said.

While Congress incrementally tightened bankruptcy laws around student loans, it also expanded and loosened restrictions on its lending programs.

  • In 1992, Congress created the Direct Lending pilot program, which included unsubsidized Stafford loans. Those loans, which are only issued through accredited universities and colleges, are more attractive for students because interest does not begin to accrue until after they are out of school. That same year, Congress also eliminated borrowing limits on PLUS loans, which are loans for parents and graduate students. These loans typically have higher interest rates than those for undergraduate students.
  • In 1999, Congress introduced discounts on interest rates for new loans and consolidation loans for borrowers.
  • In 2005, the Higher Education Reconciliation Act reduced fees on some loans, expanded the PLUS loan eligibility requirements and eliminated a minimum income requirement to take out loans.
  • Two years later, programs were expanded again with boosts to the Pell Grant, a grant for low-income students and the creation of the Public Service Loan Forgiveness Program, which forgives loans after 10 years for qualifying public sector jobs. Income-based repayment plans were also created that year.
  • From 2005-2007, private student loan underwriting standards were also loosened by Congress, according to a 2012 report from the Consumer Financial Protection Bureau. The numbers of lenders who issued loans directly to students without school involvement or certification increased from 18 percent to 31 percent, according to its report.

By 2010 the federal government became the biggest, direct lender of student loans.

“Things really started to accelerate into the 90s and really rapidly in the 2000s,” said Minsky.

Under the federal bankruptcy code, there is only window by which student loans can potentially be eliminated through bankruptcy. It is called the “Brunner test,” from a 1987 federal case in New York state.

According to the Brunner test, which only applies to student debt, in order to qualify for bankruptcy, borrowers have to prove that paying back the loans is causing them “undue hardship.” Courts determine whether borrowers meet that standard in three ways:

  • The debtor must to show they cannot maintain a minimal standard of living if they are forced to repay their student loans.
  • They must show there are additional circumstances to indicate that their current situation is likely to persist for a significant portion of the repayment period. “This is hard for people to prove. It can involve involve expert testimony about jobs that are available to you in the workforce,” said the UW Law School’s McDermott.
  • They have to show they have made good faith efforts to repay their loans.“If you have someone who has never bothered to make any payments at all and then trying to get their loans discharged, that is going to hurt them,” McDermott said.

“There are rare cases where, in extreme circumstances, people are able to convince a bankruptcy judge that they’re entitled to the undue hardship exception,” McDermott said. But the lender who issued the loan can always appeal the decision, she added.

Bigsby and other attorneys argue that the Brunner test is a high bar and a vague, subjective metric that is difficult to prove in court.

It’s also antiquated and has not been updated or changed to fit the current student lending landscape, McDermott said.

“The Brunner test is completely removed from the context in which it was created and it’s still pretty universally enforced,” she said.

The federal government’s 10 income-based repayment plans also make it difficult for borrowers to prove undue hardship because no matter how little borrowers make, they can get on a plan where payments are adjusted to their income. But, for many borrowers, an income-based plan is a short-term fix that does not ultimately help them get out of debt because interest accrues quicker than the ability of the borrower to pay down the principle of the loan.

Borrowers on these plans are eligible to have their loans forgiven after 20 or 25 years, but will be taxed by the IRS on the total loan balance that was forgiven because it will be considered income.

Income-based repayment also diminishes the chance that federal student debt can be discharged in bankruptcy court, Bigsby said.

“A lot of judges just aren’t accepting,” Bigsby said. “They have this attitude that it’s student loan debt, you benefited and should repay.”

Many people Bigsby encounters want to ignore creditors and hope they go away. That is inadvisable, particularly if the lender is the federal government.

“The problem is, if you’re going to ignore the federal government, you’ll end up with an administrative wage garnishment. Those are really hard to undo,” she said.

The government can also take tax refunds and seize other federal benefits, which can hit older borrowers especially hard. The number of borrowers age 60 and older have more than quadrupled over the last decade, according to figures from the federal government.

“That’s a very difficult situation. Those are the dilemmas I’m dealing with,” Bigsby said.


Katelyn Ferral is The Cap Times' public affairs and investigative reporter. She joined the paper in 2015 and previously covered the energy industry for the Pittsburgh Tribune Review. She's also covered state politics and government in North Carolina.

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