I recently read an article that was posted in a consumer bankruptcy attorneys forum titled “Student Loan Debtors Using Chapter 13 Bankruptcy to Buy Time On Payments“. This article was about “Do it Yourself Income Based Repayment Plans” for student loan Debtors by using Chapter 13 of the Bankruptcy Code. I was happy to see this article, because it addresses a subject I have been thinking about a lot, although it does not resolve the issue in my mind. Then I read a second article on the same subject, and decided I should blog about it.
Student loan debt has become the largest source of non-mortgage consumer debt in America. It is also generally not dischargeable in bankruptcy. In the United States, there is now over $1.2 Trillion of student loan debt. I recently posted on my Facebook page an article about retirees whose social security checks are being garnished to pay their own (not simply their children’s) student debt. The Pew Debt Study reports that about 25% of Generation X’ers are still paying their own student debt, even while many are trying to send their own children to college. There have been any number of articles written about Generation Y’ers who are simply putting off getting married, buying homes and starting families because they are saddled with so much student loan debt. A new article recently came out, saying that the problem is even bigger for millennials. The article indicates that millennials are delaying so many milestones that student loans are the reason “Millennials Will Never Grow Up”. The Federal Reserve Bank of Philadelphia recently released a study showing that student loan debt is even impairing small business formation. It is normal now for a student to graduate with over $35,000.00 of student loan debt, and I have had people on my own payroll who have had over $100,000.00 of student loan debt. This whole system has become unsustainable. To add injury to injury, the Congress saw fit to amend the Bankruptcy Code to make student loan debt all but non-dischargeable in bankruptcy. Not only did Congress make government student loans non-dischargeable, but they made all student loans non-dischargeable, including loans made by private banks, as well as debt owed to the schools themselves.
Bankruptcy is the safety valve that is built into the system for people who find themselves with more debt than they can handle. One of the very reasons we have a Bankruptcy Code is that some people have so much debt, it simply does not make sense for them to get out of bed and go to work. Whatever they make will be taken by their creditors. There is no opportunity for them ever to be productive citizens. In the case of government student loans, there are certain income based repayment programs in place. However, there generally are no such programs for the private student loans, and no requirement, or even suggestion, that private lenders should have such programs. In addition, there are ways for people to be disqualified from the government income based repayment plans. As such, there is a huge quantity of debt out there that is crushing the souls of the people who owe it, and there is no means for them to get rid of it.
Some people have started using Chapter 13 Bankruptcy as a form of “Do It Yourself Income Based Repayment Plan” for their non-dischargeable student loans. The upside to this is that for five years the debtor has a manageable repayment plan. For all but the so-called “high income debtors” the Chapter 13 Plan is based on the debtors’ actual budget and only requires that the debtor pay the creditors what the debtor can actually afford. Chapter 13 may open up a window of five years (or longer if the creditor takes a nap) for debtors to get their affairs in order and hopefully approach the problem of student loans from a stronger position later. Unfortunately, that is just kicking the can down the road. The debt is not discharged, and accrues interest during the five years of the plan. The debt may actually increase.
It is because a single Chapter 13 filing creates no permanent solution, unless the Debtor’s circumstances really do change during those five years or so, that I personally am a bit queasy about encouraging such a thing. Left unanswered is the question of what happens at the end of the Chapter 13 Plan. This is a relatively new area. Student loan debt was easier to discharge ten years ago. Student loan debt has become more crushing with time, so the student loan problem is much bigger than it was five years ago. As such, there are very few people who have completed five year plans in which the main purpose of the plan was to kick the student loan can down the road, and then filed a new one.
As such, there is a serious issue as to whether or not a person can re-file a new Chapter 13 after completing the old one. There is a waiting period before a person can receive another discharge, but because student loans are not discharged, that is not an issue. I would envision using the threat of a second Chapter 13 as much as a lever as an actual strategy. After all, if kicking the can five years down the road does not solve the problems, then kicking it ten years, or twenty years, or even fifty years hardly seems like a good idea, unless the person doing it is on track to be one of those people at risk of having their social security checks garnished by their student loan collectors. At least in that situation, I could argue that spending the rest of your life in Chapter 13 could make some sense. However, the threat to the debt collector of receiving a life time of de minimis Chapter 13 payments might inspire the collector to make a better deal. A debt collector who once insisted upon receiving $800.00 per month but has spent the last five (5) years getting $40.00 a month from the Chapter 13 Trustee might suddenly find that $100.00 or $150.00 a month is perfectly acceptable. The collector might even be willing to sunset the debt, say $150.00 a month for five or ten years and then it is done. Another advantage of simply kicking the can down the road for its own sake is that Congress made a mistake in making student loans non-dischargeable. As I discussed above, we have bankruptcy for a reason. As the student debt crisis grows, it becomes increasingly apparent that something must be done. There are politicians now seriously proposing across the board debt forgiveness. It strikes me that there is a middle path between absolute non-dischargeability, and across the board debt forgiveness. That middle path would be to treat student loan debt, especially the private version, like every other debt and make it subject to bankruptcy. After all, even income tax debt can usually be discharged after only three years. Then the people who need the relief can get it on the same terms and conditions as they get relief from every other type of debt. The people who can afford to pay their loans, will pay their student loans in the same way they pay all their other debt. I do not own a crystal ball, and have no idea what the law will be in the future. If student loan debt is brought back into the bankruptcy system, it will probably be brought back with its old restrictions, such as the seven year wait before a student debt becomes dischargeable. However, I think it is a pretty good bet that the current draconian treatment of student loans will not persist indefinitely. I simply do not see how it can. Chapter 13 may be the bridge that gets the borrower from the current draconian system to what will hopefully be a more realistic approach in the future.