Even Bankruptcy Judges Think Student Loan Laws Are Wack

Buried in the paper this past weekend, in the Business Section, was a little gem of an article called Judges Rebuke Limits On Wiping Out Student Loan Debt:

… the ruling captured the attention of other judges and legal scholars because of a judge’s bluntly worded written opinion that rebuked the widely adopted hardship standard used to determine whether a debtor is worthy of a discharge.

The judge, Jim D. Pappas, in his concurring opinion for the bankruptcy appellate panel decision in the United States Court of Appeals for the Ninth Circuit, said the analysis used “to determine the existence of an undue hardship is too narrow, no longer reflects reality and should be revised.”

He added: “It would seem that in this new, different environment, in determining whether repayment of a student loan constitutes an undue hardship, a bankruptcy court should be afforded flexibility to consider all relevant facts about the debtor and the subject loans.” But the current standard, he wrote, “does not allow it.”

Judge Pappas isn’t the only critic. Although plenty of cases still hew closely to a strict interpretation of the test, some judges and courts have signaled in recent years that they believe the rigid standard — known as the Brunner test — should be reconsidered, even if they are still bound to it now.

Right now, as you may know, you can file for bankruptcy and remain responsible for continuing to pay your student loans. In order to get that burden lifted, you must undergo a separate, arduous process of proving “undue hardship” but also — really and truly — the “certainty of hopelessness.” (!)

To stop debtors from trying to prematurely cancel their debts, the case laid out a three-pronged test: Individuals must prove they made a good-faith effort to pay the loan by finding work and minimizing their expenses. Debtors must also show they could not maintain a minimal standard of living based on their income and expenses if they had to repay the debt.

But then, in arguably the most challenging prong, the court must consider whether that situation is likely to persist for a significant part of the repayment period — which essentially requires the judge to predict the debtor’s future, ensuring what some courts have described as a “certainty of hopelessness.”

That is easily the most rigid, and most absurd, legal standard I’ve ever come across. Who can prove certainty of anything, let alone despair? Gravity, maybe. Taxes. That you can’t make love stay. Everything else is variable.

Does the bar really need to be set quite so high? And do we really have to wait until desperate people are hopeless to help them?

Bankruptcy judges, hardly the long-haired radicals of yesteryear, are beginning to rebel, and good for them. The next step is for more struggling, underwater loaners, ones who may or may not be entirely without hope but who still have very little chance of ever being able to discharge their debts responsibly, to take the matter to the courts. Their odds may be better than they think.

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