Bankruptcy, Law Schools, Money, Student Loans

Can You Show ‘Undue Hardship’ On Your Student Loans? You May Be Surprised.

I’ve said countless times that discharging student debts through bankruptcy is nearly impossible because you must make a showing of “undue hardship.”

Showing undue hardship is a very high bar, and it takes a very long time. Prospective law students don’t really understand the difference between student loan debt and something like credit card debt until it’s way too late. And even when it’s too late, most people (and many lawyers) feel that it’s not even worth trying to convince a bankruptcy judge that a person holding a J.D. has the “certainty of hopelessness” required to get student debts discharged.

But an article this weekend in the New York Times suggested that more people should give “undue hardship” a whirl. Sure, the guy the Times chose to feature is freaking blind, but even absent a physical disability, the article suggests that undue hardship might be a real possibility for most people.

Hey, it doesn’t hurt to try. At least, it hurts less than the likely plan B of stabbing out your own eyes….

The Times article details the history of undue hardship and the difficulty of convincing a bankruptcy judge that it exists in a given debtor’s case. The thing that strikes me is how humiliating it is to even ask for an undue hardship exception:

Most [bankruptcy judges] have settled on something called the Brunner test, named after a case that laid out a three-pronged standard for judges to use when determining whether they should discharge someone’s student loan debt. It calls on judges to examine whether debtors have made a good-faith effort to repay their debt by trying to find a job, earning as much as they can and minimizing expenses. Then comes an examination of a debtor’s budget, with an allowance for a “minimal” standard of living that generally does not allow for much beyond basics like food, shelter and health insurance, and some inexpensive recreation.

The third prong, which looks at a debtor’s future prospects during the loan repayment period, has proved to be especially squirm-inducing for bankruptcy judges because it puts them in the prediction business. This has only been complicated by the fact that many federal judicial circuits have established the “certainty of hopelessness” test [to their financial lives for much of the repayment period].

Most people have a modicum of self-respect. And people with self-respect balk at allowing a judge to determine whether their “minimal standard of living” is destitute enough. People with self-respect don’t like standing up in open court and saying they will be hopeless forever. One bankruptcy lawyer interviewed for the article talked about a client who perjured herself on the stand because she couldn’t admit her situation was as desperate as it really was. It’s like bankruptcy judges are using people’s pride and dignity against them when it comes to discharging their debts.

But as Marsellus Wallace might say, that’s just pride messing with people. F pride. At least, that’s what Marsellus Wallace would say if he were a law professor:

Some academic researchers have come to a different conclusion, however. Rafael Pardo, a professor at the Emory University School of Law, and Michelle Lacey, a math professor at Tulane University, examined 115 legal filings from the western half of Washington State. They found that 57 percent of bankrupt debtors who initiated an undue hardship adversary proceeding were able to get some or all of their loans discharged.

Jason Iuliano, a Harvard Law School graduate who is now in a Ph.D. program in politics at Princeton, examined 207 proceedings that unfolded across the country. He found that 39 percent received full or partial discharges.

Wouldn’t you take a 39 percent chance to get out of all or some of your debt? Let me put it this way: there are a whole lot of people in law school right now who DON’T have a 39 percent chance of getting a job that pays well enough for them to pay off their loans. In the crazy world of the law school lottery, 39 percent isn’t a terrible bet.

Of course, it helps to be desperate. You’d have to be a pretty carved-out shell of a man to claim undue hardship and certainty of hopelessness when your hardships are not undue and you still have hope. To put that in context, I’ve done about everything a person will do to get out of his debts (before I just started paying the minimum and resigning myself to my fate), and even I never tried to claim undue hardship. I always still had hope. A fool’s hope, perhaps, but hope nonetheless.

If you really have no hope, you might as well try this way to relieve some of your obligations. Then again, I’m not sure being in that situation is any better than actually stabbing out your own eyes and being done with it.

Last Plea on School Loans: Proving a Hopeless Future [New York Times]

Earlier: Not Even Bankruptcy Will Make Your Student Loans Go Away
Could Law School Loans Become More Easily Dischargeable in Bankruptcy?

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