Archive for September 6th, 2012

September 6, 2012

Want to have your student loan discharged? Prove you’re a hopeless case

by Grace

Claiming that your life has a “certainty of hopelessness” may be the only way to discharge your student loan obligation.  Embracing such a depressing personal outlook may partly explain why so few debtors try that approach.

Doug Wallace Jr., a rural Kentucky resident who graduated with a degree in sociology and now owes $89,000 in student loans, may be a sufficiently hopeless case.

Diabetes had rendered him legally blind and unemployed just a few years after graduating from Eastern Kentucky University. He filed for bankruptcy protection and quickly got rid of thousands of dollars of medical and other debt.

Some background on student loan laws
According to the NY Times, the strict laws preventing most student loans from being discharged even in bankruptcy were enacted by “resentful members of Congress”.  (Interesting characterization, and I wonder where the evidence for this so-called resentment can be found.)

Before the mid-1970s, debtors were able to get rid of student loans in bankruptcy court just as they could credit card debt or auto loans. But after scattered reports of new doctors and lawyers filing for bankruptcy and wiping away their student debt, resentful members of Congress changed the law in 1976.

In an effort to protect the taxpayer money that is on the line every time a student or parent signs for a new federal loan, Congress toughened the law again in 1990 and again in 1998. In 2005, for-profit companies that lend money to students persuaded Congress to extend the same rules to their private loans.

The laws are vague about how a debtor can prove undue hardship that will result in having loans discharged.  So most judges have relied on a applying a “squirm-inducing” test that tries to predict the “certainty of hopelessness” for any particular case.  It is extremely difficult to meet this standard.

Should a “hopeless” debtor try to get relief?  It’s unclear, with competing claims about the chances of success. Very few make the attempt, with one estimate of fewer than 1,000 each year (out of approximately 5 million borrowers with a past due balance).  The appeal process is lengthy and complicated.

They will often square off against Educational Credit Management Corporation, a so-called guaranty agency sanctioned by the government to handle a variety of loan-related legal tasks, from certifying students who are eligible for loans to fighting them when they try to discharge the loans in bankruptcy court.

On its Web site, the agency paints a picture of how much of a long shot an undue hardship claim is, noting that people “rarely” succeed in discharging student loan debt.

In contrast, some studies have found that up to 57% of cases resulted in at least partial loan relief.

Ironically, expressing hope about your future prospects may render your case hopeless.  Any glimmer of optimism from a struggling debtor decrease the chances for a judgement of a “certainty of hopelessness” and subsequent discharge of loan obligations.

How hopeless is Mr. Wallace’s case?  I find it hard to feel optimistic for him.

In the meantime, Doug Wallace, the blind man in Ohio, is nearing the end of his long wait for a ruling.

In December 2010, C. Kathryn Preston, a federal bankruptcy judge in the southern district of Ohio, tried to assess Mr. Wallace’s hopelessness by pointing to expert testimony that blindness does not necessarily lead to an inability to ever work again. But she also noted that because he lived in a rural area, he faced significant transportation obstacles. So she set a new court date for Sept. 5, to give him “additional time to adjust to his situation.”

The question for Mr. Wallace then became what sort of adjustments he was supposed to make aside from a court-ordered $20 monthly loan payment. His routine has not changed much. Aside from hernia surgery a few months ago, his days consist of sitting close to the television (he can just make it out through one eye that still has a bit of vision) and regular trips to the gym with his father. His college diploma hangs on the living room wall, and at night he sleeps underneath it on the couch of the rental house he shares with his father and sister.

Mr. Wallace’s sister, a community college student, is sometimes around during the day while his father works at a Honda factory. There are few visitors. “I’ve got friends around here, I’m sure, but they’ve got lives for themselves,” he said. “So I don’t really bother them.”

The judge did not explicitly order him to move closer to a training center, and his lawyer, Matt Thompson, said that doing so would set him up for certain failure. “I don’t think there is anyplace he could go in central Ohio and live on $840 a month,” he said.

Logistics aside, Mr. Wallace said that it was hard to imagine his overall situation ever improving and wondered who would hire a blind man in this economic environment.

“Do I think I’m hopeless?” he said. “Well, yeah, I mean, by looking at it you would think I am hopeless. Like it won’t get better for me.”

Related:  You can discharge your student loan obligation . . . if you die or become quadriplegic (Cost of College)

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