Bankruptcy and Student Loans: Clearing Up Arbitrary Outcomes for Better Results

June 11, 2013

We wrote recently about a landmark bankruptcy case that allowed one student loan debtor to have $50,000 of his $80,000 student debt relieved. This was important as a precedent setting case, but it took 10 years of wrangling and a legal team to get this verdict. This represents time and resources that most student loan borrowers just don’t have.

So today I ask, what good is bankruptcy law that allows for student loan relief if it is difficult to obtain and – even worse – applied inconsistently? One of the good (and bad) things about our legal system is the freedom of judge and juries to act in the ways they think appropriate within the context of the law for the peculiar circumstances presented in each case. What this also means though is that the law may not be applied consistently. Such is the case with student loans and bankruptcy relief.

I recently came across an intriguing analysis of student loans and bankruptcy by two professors entitled The Real Student-Loan Scandal: Undue Hardship Discharge Litigation. The study was authored by Rafael Pardo, Associate Professor of Law at Seattle University and Michelle Lacey, Assistant Professor in the Department of Mathematics at Tulane University.

The professors wrote: “Over the past three decades, Congress has continued to curtail the bankruptcy relief available to student loan debtors” and then go on to disparage (and rightly so!) the 2005 amendment to the Bankruptcy Code that allowed for-profit lenders to use the code as a shield.

The underpinning of the study is the imbalance of power that exists when it comes to bankruptcy and student loans. For financially strapped borrowers to succeed in getting relief from student loans, they must find the resources to pay for counsel. And as the study shows, not just any counsel will do – to get student loan relief, you need more than your run of the mill bankruptcy lawyer!

The study authors state their goal is “to provide an empirical account of the litigation process for bankruptcy debtors who have had to litigate their claims for relief” and whether there is equal access to “justice.” This explains why they needed both a law and a math professor – this is both legal and statistical analysis, so the team seems well suited.

The duo considered bankruptcy cases in Washington state over a period of recent years. They looked at which debtors were able to have some (or all) student loan debt discharged and the circumstances attached to those cases. I won’t dig too deeply into the methods, statistics, charts and graphs, but if you want to explore it, you can download and read the study for free at SSRN.

When the authors compared debtor circumstances to find out why certain debtors were able to have some (or all) of their student debt eradicated in bankruptcy, they found that:

(1) factors did not relate to matters of legal interpretation such as debtor’s income and expenses

(2) factors instead depended on more arbitrary factors such as the lawyer hired and judge assigned to the case.

Here is a brief roster of prevalent characteristics when student loan debt is more likely to be excused:

• Debtor or dependent had a medical condition
• Debtor never completed their degree
• Debtor was unemployed
• Debtor had not been making student loan payments
• Creditor was ECMC (the Federal student loan collection agency)
• Debtor was represented by a highly experienced attorney
• Debtor was represented by a specific lawyer with a high degree of experience

In short, our takeaway from the study is that if you are financially strapped and are considering bankruptcy for debt relief:

(1) You should definitely include an adversarial proceeding to try and include your student loans.

(2) You should thoroughly research and choose your attorney carefully and look for someone with a track record of success in adversarial proceedings.

The law should apply equally and what should factor into your odds of getting student loan relief is the three prong Brunner test and other matters of law, but as this study has shown, circumstantial and arbitrary factors too often come into play.

As a reminder, this Sunday is Father’s Day. If your hubby has student loan debt, and is an eco-friendly Dad, why not sign him up for’s free student loan tool so he can track all of his school debt in our easy interface! Also enjoy these related blog topics

Proposed Bankruptcy Law and Landmark Case Hold Hope for Student Loan Debtors

Hope for Student Loan Debtors in Recent Bankruptcy Ruling

How Bankruptcy Protection Can Provide Financial Help for Students

In Financial Crisis Over Student Loans? Money Expert Offers Startling Advice