Hacker News Reader

Comment by will_brown | Hacker News Reader

I have been thinking about the following lately...

Myth: Student loans are not dischargable in bankruptcy.

Truth: Student loans are dischargable in bankruptcy, albeit at a higher standard than other personal debts.

Now the myth, or what one might call the propaganda, is generally attributable student loan debt holders who don't want debtors knowing and worse availing themselves to their rights. However, what I find most odd is the myth/propaganda is now actually perpetuated more by people who know the truth but want student loan reforms. For example, they will generally ignore the ability to discharge student loans in bankruptcy at all or other methods of forgiveness such as "total and permenant disability". Also I notice when confronted with the truth they perpetuate the myth by exaggerating how many people actually qualify for relief.

View on HN

That's not really a "lie" per se. In the USA it would only be dischargeable by 0.01% of people, or some freakishly low number. The standard of discharge wrt student loans is so ridiculously high. The case law shows that a person, to get them discharged, essentially needs to have zero chance of ever being able to hold a job or work again. There have been quadriplegics who couldn't get them discharged for hardship. The bar is so high, it is essentially impossible for all but the severely, severely unfortunate among us. If you have the potential to hold any sort of job at any point in the future, it's effectively impossible to discharge.

So while it's not technically true, the ability to discharge student loans is such an edge case, saying they're nondishargeable is effectively true.

It's neither a lie nor a myth, yet the truth is surprising.

A 2011 study found only 0.1% of student debtors in bankruptcy even apply for discharge of student loans. Yet of that self-selecting group, 40% were successful. The question is why more don't apply for discharge, and how successful they might be.

Regardless, this does show that "student loans are not dischargable in bankruptcy" is generally true, given a discharge rate of only 0.04%.

Source: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1894445

Iuliano, Jason. "An Empirical Assessment of Student Loan Discharges and the Undue Hardship Standard." Princeton University, Woodrow Wilson School of Public and International Affairs, Department of Politics. July 24, 2011. 86 American Bankruptcy Law Journal 495 (2012)

I guess that means 60% are unsuccessful. My friend who was jailed for 5 years could not even get a deferment. He had large fines added to his loan for missing payments. In prison he could only earn some trivial amount (cents on the dollar) for working, so it was impossible to keep up with the loans.

The decision about whether one can discharge or not discharge in bankruptcy is determined by the court. The decision about whether one can defer or not defer is determined by the loan administrator.

I'm guessing that upon release, your friend would be (have been) an outstanding candidate for being able to discharge the loans (and penalties and interest) through a bankruptcy proceeding.

> The question is why more don't apply for discharge

Maybe a substantial number did the research and determined they weren't eligible?

No it is because rather large percentages of people who file bankruptcy do so pro se, without a lawyer, or worse pay a "bankruptcy mill" who charges a low flat fee to complete cookie cutter bankruptcy petitions, but since they don't generally actually become attorney of record they don't represent the debtor at these hearings.

>Maybe a substantial number did the research and determined they weren't eligible?

Everyone is "eligible" to argue that student loans are a substantial hardship and have the Court rule. Odds are the legitimate bankruptcy candidate can likely show hardship of significant crushing student loans. Moreover, there is no reason 100% of bankruptcy petitioners without student loans shouldn't list them.

> there is no reason

Cost, time and effort can be reasons, surely?

E.g. if my loans are $50k, and I or my lawyer think that the odds of getting them eliminated are <1%, then based on the expected value, I should spend less than $500 of time and effort on it.

The cost, time and effort is the bankruptcy itself. Once that step is taken it would be the equivalent of omitting any other debts because the cost, time and effort it listing them.

I think maybe your hypothetical is assuming the cost/benefit of a bankruptcy purely for a student loan as opposed to multiple debts, and I am addressing my desire to see 100% of those already filing bankruptcies to list student loans, and as you will see another comment listed the statistics, it is a tiny percentage of filers who list student loans, but of those who do nearly 40% are successful.

> if my loans are $50k, and I or my lawyer think that the odds of getting them eliminated are <1%, then based on the expected value, I should spend less than $500 of time and effort on it.

Leaving the probability aside, this assumes that expected values of money are linear. The negative value of debt grows faster than linear; a debt of $50000 is not exactly 10 times worse than a debt of $5000, if you can arrange your finances to pay the $5000 but could never successfully pay $50000 (for instance if the amount you can afford to pay down regularly would cover a large part of the principle on the former but almost entirely interest on the latter).

That's true, but then the amount I'm willing to pay in the example above should be even less than the expected value of $500.

I once read one way of getting (sort of) rid of them is by moving abroad and no longer paying. The debt holder won't be able to collect. Then, when living abroad, you negotiate the debt down to 20-25% of the original amount, and you pay that in one lump sum. Result: you saved a ton of money. Doesn't seem too bad of a deal, given near bankrupt companies do this all the time. Financial engineering (or shenanigans, whatever you want to call it) ahoy!

Except for the part where you have to leave your home for many years.

I lived abroad English teaching and its a known strategy.

Generally the goal was to stay ten years with no payments so the loan would be dropped and removed from your credit score

With most these student loans the government guarantees the lender will get their money back, even if the loan is defaulted. Thus, the proliferation of bad loans as there's no risk to the lender.

Yes, you've hit the crux of the issue. The money lended has essentially no risk to the lender (assuming the US govt doesn't collapse). And schools can charge as much as they want. So since loans are riskless, anyone can get one, so schools just charge a bunch because, why not, why not have seventeen overpaid deans and a new recreation facility? The people who lose are the borrowers.

Is a student loan a full Full Recourse debt? My understanding with the bankruptcy process here in Australia is even though you may declare bankruptcy it is still up the proceeding Judge to make the determination based on your circumstance and sometimes can deny the claim for bankruptcy but require the creditor to re-adjust the term of the mortgage either via change in the debit amount or the repayment schedule.

I imagine this kind of thing varies between countries. It appears the standard in the US is that if repaying the debt would be an "undue hardship" then a judge may discharge it in bankruptcy. You can also file a different kind of bankruptcy that can change your repayment terms, though I think mostly the schedule rather than the actual amounts.

This is all from ~5 minutes of research though, so take with salt as appropriate.

http://www.studentloanborrowerassistance.org/bankruptcy/

The issue is that being able to discharge student loans is more a function of either becoming a near-vegetable or losing both arms and both legs. It's not really the result of bankruptcy as most people know it.

Reply on news.ycombinator.com