Wiping away student loans in bankruptcy is nearly impossible, so goes the conventional wisdom. But officials and lawyers in at least one state are trying to change that.
The Massachusetts Bar Association recently launched the Student Loan Bankruptcy Assistance Project. It aims to get more attorneys, even those who don’t specialize in bankruptcy or student loan issues, to represent borrowers trying to have their debt wiped away, on a pro bono basis.
The idea for the program came out of a recommendation from a Student Debt Working Group convened by the state’s Attorney General Maura Healey, who has aggressively pursued student loan companies and for-profit colleges during her tenure. Helping struggling borrowers access representation is just one aspect of her office’s efforts to curb the state and nation’s student loan problem, Healey said in a recent interview with MarketWatch.
“Doing a loan discharge through bankruptcy is complicated, it’s hard,” she said. “Under current law, the people who are most likely to be eligible for a discharge are the least likely to be able to afford a good lawyer.”
Despite rising student loan debt and the number of borrowers who are struggling, student loans are still notoriously hard to discharge in bankruptcy. In the 1970s, Congress passed a law banning student loan borrowers from erasing their debt in bankruptcy except for in cases of “undue hardship.” Lawmakers never defined that phrase, but through case law, a standard has developed known as the Brunner test, which is followed by most jurisdictions.
Under the test, borrowers have to prove that they can’t maintain a minimal standard of living if forced to repay their loans, that their circumstances are likely to persist, making it difficult for them to repay the loans in the future, and that they’ve made a good-faith effort to repay their loans already.
That high standard means that only a small share of student loan borrowers in bankruptcy attempt to have their loans discharged and that they’re unlikely to be successful without a lawyer, said John Rao, an attorney at the National Consumer Law Center and consumer bankruptcy expert.
“A project like this basically gives the consumer the opportunity to have their day in court,” he said. Borrowers are often going up against deep-pocketed opponents — student loan companies and the Department of Education — willing to fight any attempt to have debt discharged.
And winning these types of cases involves using litigation strategies like discovery and gathering expert witness testimony, which can be nearly impossible for borrowers to do without an attorney, he said. The borrowers in the best position to win a discharge because they’re struggling to pay their loans now and unlikely to be able to pay them in the future, are also those least likely to be able to afford an attorney, Rao said.
Rao is preparing training materials for lawyers interested in representing student loan borrowers through the program to use to understand best practices for litigating the cases.
The Massachusetts program builds on the efforts of a handful of lawyers across the country who are looking for creative ways to help borrowers get rid of student loans in bankruptcy. Richard Gaudreau is one of these attorneys. Through his New Hampshire and Massachusetts-based practice, he’s developed tactics — like questioning whether the debt even qualifies a student loan in the first place — that have helped some of his clients.
But there aren’t many attorneys with a practice like Gaudreau’s. That’s in part because bankruptcy attorneys typically aren’t litigators so they may be hesitant to take on these cases, particularly given their reputation for being un-winnable, he said.
The experience of representing a client in bankruptcy pro bono helped Kerime Akoglu, a Boston-based associate at the large law firm, Mintz Levin, realize her litigation skills could be deployed to make a dent in the nation’s student debt problem. And Akoglu said she’s encouraged to see her local bar association and attorney community realize they should represent people and work to address the issue of student debt.
“This is a universal stress,” she said. “Debt is so personal, it affects your life day-to-day. It affects what you’re thinking about now, you think about your past and the choices that you’ve made, you think about your future and the choices you can’t make.”
If some of the attorneys trained by the Massachusetts Bar Association are successful in getting their clients’ loans discharged and those wins generate some publicity, that could help push attorneys in other areas of the country towards representing borrowers, Gaudreau said.
“It’s definitely a big perception problem,” he said of the reason why so few student loan discharges are attempted in bankruptcy. Raising awareness among borrowers and lawyers about the possibility of a bankruptcy discharge is indeed one of the goals of the program, Healey said.
“Many students just feel so demoralized and behind the ball,” she said. They don’t know that it’s even possible to apply for a discharge.”