Two bankruptcy cases made the news in March that will be of interest to New York bankruptcy debtors. One of them was even a Brooklyn bankruptcy.
The first case appeared in the Boston Globe. Echoing my post on the economic risk calculator, a debtor earned $165,000 annually as president of a manufacturing company and borrowed $220,765 in Parent PLUS loans, which allow parents of college students to borrow on their children’s behalves. Fourteen years later, his company moved overseas, he owes $246,000, and his wife makes a scant $13,200. Their home is in foreclosure.
However, a Massachusetts bankruptcy court denied the debtor a discharge, arguing that he didn’t meet the First Circuit Court of Appeals’ version of the “undue hardship” test that permits discharge of student loans. The debtor was still fit and well educated. Although the court of appeals delayed its decision, one of its members asked, “If this doesn’t constitute undue hardship, what would?” The debtor and the Educational Credit Management Corporation (ECMC) were encouraged to settle the case. ECMC is well known as a frequent participant in student-debt bankruptcy cases.
The case isn’t a morality play about financial hubris (or the fickleness of bad luck), but it does illustrate why Parent PLUS loans are a bad idea. They are not eligible for most income-sensitive repayment plans, and debtors, including this one, often repay significant portions of the loans without making much of a dent in them. Often, the most reasonable best case outcome is agreeing to enter into some kind of income-based repayment scheme with ECMC that will take decades to pay off.
As for the Brooklyn bankruptcy case, the issue wasn’t the debtor’s $300,000 student loans, which the bankruptcy court refused to discharge. Rather, it was the debtor’s $15,000 bar-exam-preparation loan she took out to study for the test to obtain a law license. It’s unclear from the Wall Street Journal article on the subject, but as a 2009 law-school graduate she may have taken out private student loans instead of Grad PLUS loans. The Grad PLUS Loan Program allows graduate-school or professional-school students to borrow up to the total cost of attendance plus living expenses on top of other federal student loans. Many students borrower the maximum amounts offered, which is why stories of law students who owe so much money are common.
Grad PLUS loans are eligible for income-based repayment programs, relieving borrowers, but what about bar-exam loans? According to the Brooklyn bankruptcy court, they aren’t educational benefits or stipends subject to the undue hardship test. Instead, they are “an arm’s-length agreement on commercial terms,” and thus they can be discharged in a chapter 7 bankruptcy. An Alabama court took the contrary approach several years ago, so New York debtors are lucky, particularly because the bar-exam loan in this case would not have been eligible for an income-sensitive repayment plan.
Student loans are increasingly problematic, especially PLUS loans. Although Parent PLUS loans probably won’t become dischargeable any time soon, bar-prep loans might be treated more lightly in New York. If you are having difficulties repaying your student loans, then talking to a New York bankruptcy lawyer can help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced fair debt collection practices act Bruce Weiner for a free initial consultation.