Consumer Bankruptcy Attorneys Call for Return of Bankruptcy Discharge for Student Loans

Mark Kantrowitz

February 08, 2012

The National Association of Consumer Bankruptcy Attorneys (NACBA) held a press conference on Tuesday, February 7, 2012 during which they called on Congress to allow federal and private student loans to be discharged in bankruptcy, to restore a reasonable statute of limitations on student loan collections and to improve oversight of private collection agencies. NACBA also released the results of a survey of U.S. bankruptcy attorneys concerning unmanageable student loan debt.

William E. Brewer, Jr., president of NACBA, referred to student loan debt as the next “debt bomb” for the U.S. economy. The NACBA Student Loan Debt Report compares the situation to the early stages of the subprime mortgage credit crisis, saying that “more and more consumers are seeking their help with unmanageable student loan debt, and with no relief available.”

NACBA released the results of a January 2012 survey of 860 U.S. bankruptcy attorneys concerning student loan debt. Four-fifths of bankruptcy attorneys reported an increase in the number of potential clients with student loan debt in the last 3-4 years, with half of the attorneys reporting a significant increase.

Among potential clients with unmanageable student loan debt, the bankruptcy attorneys said that they were much more likely to have attended not-for-profit colleges and universities than for-profit schools. The bankruptcy attorneys also reported that a significant percentage of their protential clients with unmanageable student loan debt were employed, so student loan debt is not just a problem for the unemployed or underemployed.

Almost all of the bankruptcy attorneys said that few or none of their clients have a good chance of obtaining an undue hardship discharge of their student loan debt. These bankruptcy attorneys see the inability to discharge student loan debt in bankruptcy as a big problem in preventing their clients from obtaining a fresh start.

Almost two-thirds of the bankruptcy attorneys report that student loan debt collection activity has become more aggressive in the last 18 months. Three-fifths of the bankruptcy attorneys have potential clients who are still being pursued for student loan debts that are more than 15 years old.

There is no recent data about the number of personal bankruptcy filings with student loans, in part because the courts do not break down the statistics by type of debt. According to statistics from the American Bankruptcy Institute, the number of personal bankruptcy filings of all types has increased from 601,535 in 2006 to 1,360,124 in 2011. In 2005, before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 became effective, the number of personal bankruptcy filings peaked at 2,038,842. The Educational Credit Management Corporation (ECMC), which manages all federal student loans for borrowers with an active bankruptcy filing, reported that 72,000 student loan borrowers had an active bankruptcy filing in 2008, representing about 7% of all personal bankruptcy filings. Of these, only 29 succeeded in getting a full or partial discharge of their student loan debt. Borrowers are more likely to die in a car accident or of cancer than to have their student loans discharged in bankruptcy.

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