Collection agencies certainly appreciate the student loan market. There are a great number of people who cannot repay the loans they took for educational purposes. Almost 7 million Americans are in default, meaning that they haven’t been making payments on their federal student loans for at least a year. Debt collectors have the right to target the co-signers on these loans. That usually means that one of the parents gets in trouble. We explored the situation with student loan collection in the USA and came down to disappointing conclusions: the chances for debtors to get discharge in bankruptcy are minimal.
In certain situations, people can have their federal student loans canceled, forgiven, or discharged. Discharge in bankruptcy is an alternative with minor chances for a positive outcome. If the bankruptcy court finds that the repayment rates would lead you and your dependents into extreme financial difficulties, the loan may be discharged. This is a complex legal procedure based on evidence and argumentation that cannot lead to an objective evaluation.
Collection companies are quite arrogant when dealing with student loans, mainly because they know how hard it is for people to get these debts forgiven or discharged. Credit cards, mortgages, and IRS debts are automatically discharged in case of bankruptcy, but the cases for student loans are much more complicated.
Theory vs. Reality: a Real Case Shows a Hopeless Situation
The case Murphy v. U.S. Department of Education and Educational Credit Management Corporation rose to fame when Natalie Kitroeff published her comments in an article for Bloomberg Business. Robert Murphy, an unemployed 65-year-old man, acted as his own attorney for 3 years while he was trying to convince Boston federal court to consider his case.
For student debt to be discharged in bankruptcy, the debtor has to prove that the repayments would cause an undue hardship. That seems reasonable, but the problem is that lawmakers have never defined what undue hardship actually means. Murphy borrowed over $240,000 to send his three kids to college, and managed to repay $60,000 in principal and interest. The credit management corporation that holds his loans stated that the cause for Murphy’s unemployment was “self-imposed limitation on his job search.”
The position of the Department of Education on this case was controversial: they expected the court to ignore the fact that Robert Murphy has been unemployed for several years and is currently earning nothing. The government emphasized the hypothetical possibility that Murphy could get a job and start earning $40,000 per year. There were no explanations behind these assessments for an optimistic future. Mr. Murphy’s current financial situation was indisputable: he is earning nothing, and his wife’s income is hardly meeting basic living expenses. That’s why the government based the case upon unrealistic predictions for the future. Our legal system is deeply troubled when we realize that this kind of argumentation can actually work.
How can Murphy’s case make a difference? It’s very difficult for the courts to decide who deserves to be relieved from the debt, since collectors can easily think of strong arguments to support their case. However, the law still leaves some flexibility for judges to make a difference. This case caught the attention of the First Circuit Court of Appeals, so we can finally expect to see a more elaborate, clearer definition of undue hardship.
Given the fact that we see information about Obama’s Student Loan Forgiveness program on a daily basis, Mr. Murphy’s case is a sad presentation of the fact that the reality is different from what we might assume when reading the law. The lawyers that argue on behalf of the Education Department go to extremes to prove their point. They have called fast-food dinners, account contributions, nutritional supplements and cell-phone plans luxury expenses in their attempts to prove that the debtors are capable to repay the loans.
This case will be solved sooner or later. We cannot predict the outcome at this point, but there is hope that Robert Murphy’s case will be the sign of hope for millions of Americans who go through the same hardships.