Student debt may be dischargeable in bankrupcy

‘The Trillion-Dollar Lie by Matt Taibbi for TK News.  “Universities built palaces and financiers made fortunes in part through a lie: that student loans can’t be discharged in bankruptcy.  But a series of court cases is helping unravel the scam.”

For years, it was believed that .. [the Bankruptcy Act of 2005] absolutely closed the door on bankruptcy for whole classes of borrowers, and one in particular: students.  Nearly fifteen years after the bill’s passage, journalists were still using language like, “The bill made it completely impossible to discharge student loan debt.”

Even I did this, writing multiple features about student loans stressing their absolute non-dischargeability, which is one of the reasons to write this now — I got this one wrong.

In 2017, I interviewed a 68 year-old named Veronica Martish who filed for personal bankruptcy — as I put it, “not to get free of student loans, of course, since bankruptcy protection isn’t available for students” — and described her being chased by collectors to her deathbed. “By the time I die, I will probably pay over $200,000 toward an $8,000 loan,” she said. “They chase you until you’re old, like me. They never stop. Ever.”

In fact, the bankruptcy situation was murky.  Beginning in the 2010s, judges all over the U.S. began handing down decisions …. that revealed lenders had essentially tricked the public into not asking basic questions, like: What is a “student loan”?  Is it anything a lender calls a student loan?  Is a school anything a lender calls a school?  Is a student anyone who takes a class?  Can lenders loan as much as they want, or can they only lend as much as school actually costs?  And so on.

[snip]

[A lawyer named Austin] Smith believed a loan given out to a woman who’d already completed her studies, and who used the money to pay for rent and groceries, was not covering an “educational benefit” as required by law. 

A judge named Carla Craig agreed and canceled …. [her] loan, and Campbell v. Citibank became one of the earlier dents in the public perception that there were no exceptions to the prohibition on discharging student debts. “I thought, ‘Wait, what? This might be important,’” says Smith.

By law, Smith believed, lenders needed to be wary of three major exceptions to the non-dischargeability rule:

— If a loan was not made to a student attending a Title IV accredited school, he thought it was probably not a “qualified educational loan.”

— If the student was not a full-time student

— in practice, this meant taking less than six credits

— the loan was probably dischargeable.

— And if the loan was made in an amount over and above the actual cost of attending an accredited school, the excess might not be “eligible” money, and potentially dischargeable.

Practically speaking, this means if you got a loan for an unaccredited school, were not a full-time student, or borrowed for something other than school expenses, you might be eligible for relief in court.

Smith found companies had been working around these restrictions in the blunt predatory spirit of a giant-sized Columbia Record Club.

Note: When I first posted this, I forgot Taibbi’s article was behind a pay wall.  Sorry.  The gist of it is that the level of student debt is unsustainable, student loans are a racket and some student debtors are successfully filing for bankruptcy.

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