The bad news for student-loan debtors is that the U.S. Supreme Court declined to hear the case filed by a debtor to clarify the “undue hardship” standard for discharging student loans. For now, the disparate rules laid down by the federal circuit courts of appeal will remain in effect, meaning debtors’ cases depend in part on what part of the country they live in. The good news, though, according to The Wall Street Journal, is that student debtors have found an unlikely tool for resolving large student debt burdens: “borrower defense” to repayment discharge.
In the mid-1990s, Congress authorized the Department of Education to cancel debtors’ federal student loans if those debtors could show that their colleges somehow defrauded them. Until now, the rule languished in obscurity: The department never promulgated any regulations for it and only five debtors ever used it (three successfully). In the latter half of 2015, more than 7,500 borrowers filed “borrower defense” applications. Altogether, they owe $164 million of debt.
The WSJ elaborated that interest in the “borrow defense” rule coincided with the chapter 11 liquidation of Corinthian Colleges, which began last year. Corinthian ran into financial difficulties in mid-2014, highlighting a separate, yet better-known student-debt rule, closed-school discharge. That rule doesn’t do much good for recent graduates, unlike “borrower defense.” Nevertheless, the Education Department has canceled about $28 million for 1,300 ex-Corinthian students. As of now, nearly all of the “borrower defense” applicants went to for-profit colleges, three-fourths of which to Corinthian schools.
Because of the volume of “borrower defense” applications, the government has appointed a special master to resolve them. As it stands, the rule does not specify the standard of fraud debtors must show to obtain a discharge, so it’s negotiating with students and schools to create clear guidelines. Unfortunately, many debtors claim the inducements occurred orally over the phone and states’ fraud rules differ sufficiently that some student debtors might see their loans canceled while others not under otherwise identical circumstances.
The Wall Street Journal article can be found here (subscription required); the Department of Education’s “borrower defense” application for Corinthian Colleges can be found here.
For all other debtors, aside from income-based repayment programs, bankruptcy can often clear other debts to free up money for paying student loans. It can also halt collection efforts by creditors via the automatic stay. Chapter 13 bankruptcy offers advantages to student debtors as well.
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 Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
