Collector - May 2017 - 25
Failing action on the legislative front, district court judges' case-by-case interpretations of the Bankruptcy Code may help it evolve. "I don't think bankruptcy judges are out there wildly bucking against strictures that are put on them by the Courts of Appeals and by the Supreme Court and by Congress, but to the extent there is some way to sort of push the boundaries a little bit we are in fact seeing cases where that's happening," Hauser said. But it's the U.S. Supreme Court, Hauser said, that can spur real change. And right now, it doesn't seem like student loans and bankruptcy are high on the court's list of priorities. In early 2016, the court declined to hear an appeal on a case that could have changed how bankruptcy courts interpret the undue hardship requirement to discharge student loans. In Tetzlaff v. Educational Credit Management Corp., the consumer filed for Chapter 7 bankruptcy and asked that his student loans be discharged. The law school grad argued that he faced an undue hardship to repay more than $260,000 in student loan debt due in part to his unemployment, alcoholism, misdemeanor convictions and inability to pass the bar exam. The U.S. Court of Appeals for the Seventh District ruled in favor of the student loan holder, and the consumer appealed his case to the Supreme Court. At issue, according to the Supreme Court's blog, was whether the Brunner test was the proper standard to determine undue hardship and if it should be modified to eliminate the requirement that a borrower have made a good-faith effort to repay the loans (the lower court found that Tetzlaff had not), and clarified to establish that a borrower need only prove that his inability to pay is "likely to persist for a significant portion of the repayment period," not that there is a "certainty of hopelessness." In passing on the case, the Supreme Court prolonged the undue hardship ambiguity. EXPLORING OTHER OPTIONS Of course, discharging your student loans isn't always the best course of action. It's COLLECTOR 05.17 an expensive process, for one, and it can take a long time. Fisher noted that while collection activities will stop during an active bankruptcy, borrowers are often surprised to learn that interest continues to accrue. Matt Ribe, senior director of legislative affairs and corporate secretary for the National Foundation for Credit Counseling, noted that bankruptcy is not an option he often recommends to consumers grappling with student loan debt. "What we do as counselors when we are working with a consumer is help them navigate their options, and our understanding based on the state of the law and the conversations in the marketplace is that bankruptcy is not a pragmatic option, so we don't spend time dwelling on it in counseling sessions," Ribe said. ECMC's website recommends student loan borrowers consult an attorney or financial advisor to help assess whether bankruptcy is the right option for them, and points out that borrowers with a current loan who haven't yet filed for bankruptcy may want to consider other options to help manage their student loans, such as forbearance or an alternative repayment plan. If they do file for bankruptcy, borrowers should inform the current holder of their loan of the filing and list the holder as a creditor in their filing. "If we're talking about anybody who has reached a point where they are completely insolvent and are unable to move forward economically in their lives because of poor decisions, circumstances, whatever- we have developed ways for people to declare bankruptcy and restructure and have their debts dismissed," said Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators. "We do that in this country because there's something to be said for giving people a second chance. The question then becomes, why are we drawing lines around certain forms of consumer credit and not others?" Anne Rosso May is editor of Collector magazine. KEYNOTES 1 To discharge a federal student loan debt, most courts ask borrowers to demonstrate three things: A current inability to repay the loans, a future inability to repay the loans and a goodfaith effort to repay the loans. 2 Borrowers may be able to discharge private student loans without proving they are experiencing undue hardship, and some attorneys have seen success with this approach in recent years. 3 Last year, the U.S. Supreme Court declined to hear an appeal on a case that could have changed how bankruptcy courts interpret the undue hardship requirement to discharge student loans. 25