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Student Loans and Bankruptcy in Massachusetts

Bridge Team Member

There are more than 100 colleges and universities in Massachusetts graduating tens of thousands of student each year. At the same time, a student debt crisis is hitting our country, with total outstanding student loans now outstripping the amount of credit card debt. It's even inspired a documentary.

What makes this even more scary? In 2005, Congress raised the standard for discharging education loans (even from private banks) through bankruptcy, requiring applicants to prove "undue harshness", a vague and difficult bar. The Wall Street Journal tells one story:

Terri Reynolds-Rogers, a 57-year-old health-program manager from Palmer, Alaska, declared bankruptcy in 2007, but still has $152,000 in student debt. She said she dropped out of medical school in 1999 to care for her two children after her husband died of brain cancer.
Ms. Reynolds-Rogers's lenders at one point garnished $950 a month from her wages when she fell behind in her payments. She works a second job as an adjunct instructor at the University of Alaska and expects to work well beyond retirement age. "It's enslaving," Ms. Reynolds-Rogers says of her student debt. "At a time I should be looking at the possibility of retirement sometime in the near future, I'm taking on another career if I'm lucky."

How Can I Discharge My Student Loans?

There are no easy answers here. Some people are holding out hope that the crisis will burst and some new path will open up. Indeed, Congress is talking about changing the rules. However, no concrete legislation has emerged and with the presidential campaign in full swing, it's highly unlikely anything will be passed soon. Others continue to pay in the hope that a forgiveness program for those on good terms will emerge. This is also uncertain.

One study however noted that the vagueness of the standard has led to inconsistency - whether your situation counts as "undue hardship" may just be up to the judge.

Ultimately, whether or not one receives a discharge depends largely on the judge hearing the case, the researchers say. Judges have wide discretion, because Congress never adequately defined how courts should apply the undue hardship status. As a result, many judges have taken to making value judgments based on whether they believe individual borrowers deserve to have their loans discharged. These judgments often rest on the court's evaluation of "the debtor's prebankruptcy conduct." In other words, judges tend to try to assess "whether the individual debtor's bankruptcy stems from irresponsibility or rather true misfortune."

Is there a takeaway?

Talk to a local, experienced lawyer.

Lawyers often have relationships with local judges and may be able to give you a more accurate sense of whether your case is sympathetic enough. If you are thinking about bankruptcy and student loans are a big percentage of your debt, finding the right jurisdiction and judge may be the key to your success.

(Cartoon: The New Yorker)

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