As reported in USA Today, February 7, 2012, "Student debt is looming as a national problem that could have repercussions reminiscent of the mortgage crisis, says a report by the National Association of Consumer Bankruptcy Attorneys." The total student loan debt is now in excess of the national credit card debt, at about $1 trillion, above credit card debt estimated to be about $798 billion. The student loan debt is about 14 times more than 15 years ago.
Bankruptcy attorneys in a nationwide survey by NACBA, National Association of Consumer Bankruptcy Attorneys, said that they are seeing more people faced with overwhelming student loans. The NACBA report calls for changes in the student loan debt. As it stands now, there is no statute of limitations on collection of student loan debt. Student loan creditors can garnish your wages, take tax refunds, and take Social Security benefits without any court judgment. Student loans are generally non-dischargeable, and have been so since 2005. Prior to 1976 all student loan debt could be elimiated in Bankruptcy. After 1976 Congress required student loans to be in repayment for 5 years to be discharged. In 1990 the 5 year requirement extended to 7 years. 1n 1998 the 7 year requirement was elimiated. The 2005 amendments include private student loand in the nondichargeability category.
The only exception is for undue hardship. The debtor must bring a seperate lawsuit in bankruptcy court, proving that his or her loans should be discharged for undue hardship. Most people cannot meet the extremely high standard of proof and most cannot bear the cost of this lawsuit, because the student loan creditors aggressively defend these suits.
The NACBA report calls for a change in bankruptcy laws to allow a relief valve for student loan debt. In the survey, 81% of respondents said potential clients with student loan debt have increased "significantly" or "somewhat" in the past four years. And 95% of respondents reported that few student loan debtors have any chance of discharging what they owe through a bankruptcy proceeding because they have to prove "undue hardship" — a standard that is difficult to meet.
The bankruptcy attorneys association's report urges a change in bankruptcy laws, rolling back to the earlier law allowing discharge of student loans, after 5 years of repayment, so those burdened with student debt would be on the same footing as others facing bankruptcy. In addition, the group urges amendment to the bankruptcy laws allowing undue hardship to be shown at any time during repayment.
As reported by USA Today, U.S. Rep. Steve Cohen, D-Tenn stated, "It's not fair and needs to be corrected," a sponsor of legislation that would make changes suggested in the report. Cohen outlined the revisions in a conference call with reporters Tuesday, along with officials from the bankruptcy lawyers association. Douglas Lustig, a trustee for federal bankruptcy court in western New York, agreed that something should be done.
"The problem is that you have former students who filed for bankruptcy and are not able to get a fresh start," said Lustig, who also represents clients in bankruptcy court, as reported by USA Today. Those with student loan debt should be able to discharge all or part of the money owed in a bankruptcy proceeding and the law should be changed so the debt can be paid over a longer period of time, Lustig said.
The excalating cost of college tuition and room-and-board, plus the high interest rates of private loans are all adding to the increasing problem. In addition, many students must obtain masters degrees to be successful in the job market.
William Brewer Jr., president of the National Association of Consumer Bankruptcy Attorneys, offered a warning. Take it from those of us on the frontline of economic distress in America," he said. "This could very well be the next debt bomb for the U.S. economy."
I fortunate to be part of a delegation that visited our Maryland lawmakers last week. Our discussion of this issue was well received, but needs to be further highlighed by concerned groups and the media to push the issue forward on Capital Hill. Look for future blogs for updates.
If you are facing overwhelming debt, including student loan debt, contact your Baltimore Bankruptcy Attorney, or your
Montgomery County Bankruptcy Attorney to review your options.