We have testified and written about the urgent need to restore bankruptcy rights for student loan borrowers. A robust debate on this topic is certainly welcome, but it is critical to get the facts straight. Unfortunately, a recent article by Jason Iuliano published in the summer 2012 edition of the American Bankruptcy Law Journal may give the false impression that it is not so difficult for consumers to discharge student loans in bankruptcy. This document highlights the shortcomings of the Iuliano study and sets the record straight on undue hardship in bankruptcy.
We agree with the main point in the study that few consumers who file for bankruptcy try to have a judge decide if their student loans can be discharged. However, the study’s conclusions beyond this point are not supported by the empirical data and ignore the realities facing student loan borrowers.
In reality:
- A consumer’s prospects of winning a student loan discharge case are slim and worse than in typical civil litigation.
- Student loan holders and their agents, including the Educational Credit Management Company (ECMC), very aggressively fight discharge cases and are far less likely to settle out of court than in typical civil litigation.
- Most consumer debtors need representation by an attorney to bring a hardship discharge adversary proceeding. The contrary conclusion in Iuliano’s article is derived from such a small sample size that no reliable conclusions can be reached as to outcomes.
- Most consumer debtors, particularly those most in need of a discharge, cannot afford the litigation costs needed to bring a hardship discharge adversary proceeding.
Student loan borrowers desperately need relief. It is appealing, but inaccurate, to simply conclude that the current system offers such relief if only borrowers would take advantage of it. The reality is much more complex and requires systemic reform, including restoration of bankruptcy rights.
