One oft-derided, pernicious aspect of student loans is that unlike credit card debt or an auto loan, they can follow a borrower forever because they’re impossible to discharge in bankruptcy — at least according to conventional wisdom.
This week, we’re taking a look at evidence that suggests that’s not always the case. A new report indicates that as much as $50 billion in debt, colloquially referred to as private student loans and held by 2.6 million borrowers, could actually be wiped away in bankruptcy court. The findings come from an analysis published Thursday by the Student Borrower Protection Center, an advocacy group.
Over the past several years, attorneys, legal scholars and even bankruptcy judges have started to think more creatively about whether debt borrowers took on in the course of their education is eligible for discharge in bankruptcy. One attorney in particular, Austin Smith, has made a career of challenging the notion that all student debt stays with a borrower following a personal bankruptcy filing. So far, three courts of appeals have sided with Smith, indicating his clients’ debts may be eligible for discharge in bankruptcy.
“There are in fact this huge number of borrowers who are being denied their right to bankruptcy because the student loan industry is talking out of both sides of its mouth,” said Mike Pierce, SBPC’s executive director.
The analysis comes after years of research and court rulings challenging prevailing wisdom on student debt in bankruptcy
The analysis comes out of this growing body of legal research and court rulings. Though federal bankruptcy court theoretically offers a clean slate from financial obligations, Congress exempted federal student loans from discharge through bankruptcy decades ago and private student loans in 2005. For years,borrowers and their attorneys who tried to get the debt wiped away typically argued it was imposing an undue hardship on the borrower — a carve out in the law that made the debt dischargeable, but was a notoriously hard standard for borrowers to meet.
