Legislators are reviewing ways for the insolvent to discharge student loan debt

By John Sembrat, Juris Blogger
As we look to the future, legislators and the U.S. Supreme Court are redefining the way we acquire and manage student loans. Federal and private student-loan debt is approaching $1 trillion and surpassed credit-card debt for the first time in 2010, according to Mark Kantrowitz, publisher of FinAid.org, a college grant loan website. Under U.S. law, student-loan debt—unlike credit-card borrowings—can rarely be discharged in bankruptcy court.

While Bankruptcy law can help those persons succumbing to overwhelming financial pressure, bankruptcy proceedings are not for the faint of heart. The bankruptcy process is a lengthy, complicated legal process. That process is not one which normally lends itself those hardships that are associated with student loans. Currently, section 523(a)(8) of the Bankruptcy Code permits the discharge of student loan debt only if excepting the debt from discharge would “impose an undue hardship” on the debtor and the debtor’s dependants. This element has been described as “difficult to satisfy”. For those flattened by student loan debt, few other options are available through the bankruptcy court. The U.S. Supreme Court recently reviewed a case involving this other option.

In a June 2010 publication (Brubaker, Ralph, “Supreme Court Upholds ‘Discharge by Declaration” of Student Loan Debts in Chapter 13 (or Does It?)”, Bankruptcy Law Letter (June 2010), the author finds that, “the Bankruptcy Code and Rules clearly provide that to discharge a student loan debt in the bankruptcy court, the debtor must initiate an adversary proceeding in which the bankruptcy court must specifically find that ‘excepting such debt from discharge…would impose an undue hardship on the debtor and the debtor’s dependents.’ Nonetheless, a practice known as ‘discharge by declaration’ has taken hold in Chapter 13 cases whereby the debtor inserts a provision in the proposed Chapter 13 plan that provides for full discharge of a student loan debt upon successful completion of all plan payments.”

Brubaker further contends that, “discharge by declaration, though, highlights a fundamental tension that pervades the bankruptcy practice…[and there is] a difficult balance between the demands of affording all parties a fair opportunity to assert their rights and the repose and finality interests necessary for any effective judicial process and especially so for the bankruptcy process.”

Would alleviating that difficulty be a good policy? Some say yes, and some say no. Many people agree, however, that student loan debt has been growing at a faster rate than in years past. The S&P said, “student-loan debt has ballooned and may turn into a bubble…there are more [and more] defaults and downgrades for some student loan asset-backed securities”. Whether or not finding a remedy to this balloon through bankruptcy laws is debatable, and it appears to be a viable option to prevent the balloon from bursting as loudly as the mortgage backed security bubble. However, arguing in the alternative, the bankruptcy court has long traditions of denying discharge of student loan debt which have rightfully suppressed these claims for a long time. Perhaps we should let sleeping dogs lie, and find a new way out of this potential mess.

John Sembrat is a third year student at Duquesne University School of Law. He is a student manager for the law clinic office and a legal assistant with Geraghty & Associates, P.C. John earned his undergraduate degree at the University of Tennessee with majors in English and Psychology. He will graduate from Duquesne University School of Law in 2013, and can be reached at sembratj@duq.edu.

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