Court rules Student debt is dischargeable in Bankruptcy

PennyPincher

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The current system is still semi new. And it's been nothing but a massive failure. It needs to end sooner than later because the bigger it gets the worse the aftermath when it is eventually changed - which it will be without a doubt.

I think its about 14 years old now in its current form? Time to put this one to bed.
I don't know about that. My sister was getting guaranteed student loans back in the early 80s I think. I think the amounts were really small. Like maybe $2500 per school year max??? I had guaranteed loans in the late 80s and early 90s (same for my husband). The amounts were higher by then. I want to say that my husband likely had about $5k per year in loans???
 

Dench

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I don't know about that. My sister was getting guaranteed student loans back in the early 80s I think. I think the amounts were really small. Like maybe $2500 per school year max??? I had guaranteed loans in the late 80s and early 90s (same for my husband). The amounts were higher by then. I want to say that my husband likely had about $5k per year in loans???
I'm talking about the inability to realistically declare bankruptcy on them. The work by the banks started in the 70s and ended in the mid 00's, which is the current systems status minus this ruling. Every decade from the 70's to 00's became harder and harder to bankrupt the debt.

I don't think it's a coincidence that the harder easy money was to escape the higher prices. It completely destabilized the system. Giving huge amounts of money to people who probably shouldn't get it in the 1st place plus many who have no actual way to repay it is dumb. And it would be bad business also if it weren't for brilliant lobby efforts. It's basically a trap aimed at 17-18 year olds. A demographic who has virtually no experience with any major financial anything.

Here we are!
 

PennyPincher

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I'm talking about the inability to realistically declare bankruptcy on them. The work by the banks started in the 70s and ended in the mid 00's, which is the current systems status minus this ruling. Every decade from the 70's to 00's became harder and harder to bankrupt the debt.

I don't think it's a coincidence that the harder easy money was to escape the higher prices. It completely destabilized the system. Giving huge amounts of money to people who probably shouldn't get it in the 1st place plus many who have no actual way to repay it is dumb. And it would be bad business also if it weren't for brilliant lobby efforts. It's basically a trap aimed at 17-18 year olds. A demographic who has virtually no experience with any major financial anything.

Here we are!
As soon as loans were gov guaranteed (student loans) they were exempt from bankruptcy except in extreme cases. At least with mortgages there is real property backing them so the bank forecloses, the bank sells the home and the gov will make up the difference between the sale amount and the loan amount so long as it is within the guaranteed amount. ex. house is foreclosed and bank sells it for $100k less than they loaned on it. As long as $100k is equal to or less than the loaned amount, .gov pays that to the bank. The bank is whole. The taxpayer is screwed out of $100k.
 
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when the student loan debt is "discharged" through bankruptcy, or any other gov guaranteed loan, the .gov (ie taxpayers) pay the debt for the borrower. think home loans - VA, FHA, FNMA, etc - these are guaranteed to a certain percent/amount (80%?). Student loans are 100% guaranteed. The loan doesn't just "go away" in this case.
As soon as loans were gov guaranteed (student loans) they were exempt from bankruptcy except in extreme cases. At least with mortgages there is real property backing them so the bank forecloses, the bank sells the home and the gov will make up the difference between the sale amount and the loan amount so long as it is within the guaranteed amount. ex. house is foreclosed and bank sells it for $100k less than they loaned on it. As long as $100k is equal to or less than the loaned amount, .gov pays that to the bank. The bank is whole. The taxpayer is screwed out of $100k.
A large chunk of student loans are not taxpayer backed. About half my loans are fully 100% PRIVATE. One big chunk though a local NH lender and a smaller chunk through Wells Fargo. The other half were all federal Stafford loans where the government paid the interest. Even then, only half of those Stafford loans had government subsidized interest.

And while the feds took out the middleman in 2009/2010 and started lending money through the Stafford loan program directly, there are still lots of private lenders for student loans out there.

Until 2005 only federal loans and a large number of private loans (made by for profit companies IIRC) were not dischargedable in bankruptcy proceedings. After 2005, that was extended to all private loans regardless of business type (non-profit vs for profit). So now the banks can use the courts to force you to pay (garnish wages, file liens, etc) but those private loans are not taxpayer backed. Thus while the banks do put up their own capital to lend out the money, the risk is zero.

Yes I understand the feds would bail out the banks, but that is not the same as those private loans being directly taxpayer backed like federal Stafford loans are. And Several banks would probably have to go under before the feds actually bailed any out (ala Bear Sterns and Lehman).
 
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Warren claims she is going to "wipe out" most student loan debt via EO. At first I thought she was going to f*** with private contract law doing this. But it appears as though she will not do that and will only modify federal loans (the feds can break their own contract, benefit of being the feds). So private loans will still be untouched and contract law secured.

While this would actually help me, as it would wipe out half my student loan debt, I'm still not voting for her.

But Warren, writing on the website Medium, said that she would act without waiting for Congress because the Secretary of Education can “use its discretion to wipe away loans even when they do not meet the eligibility criteria for more specific cancellation programs.”

And on Twitter, she emphasized that the “Department of Education has broad authority to end the student loan debt crisis. When I'm president, I plan to use that authority.”
Along the way, I learned two key things. First, the student debt crisis is deeper than many experts thought was possible. And second, the Department of Education has broad authority to end that crisis. When I am president, I plan to use that authority.

Here’s how it will work:

  • I’ll direct the Secretary of Education to use their authority to begin to compromise and modify federal student loans consistent with my plan to cancel up to $50,000 in debt for 95% of student loan borrowers (about 42 million people).
  • I’ll also direct the Secretary of Education to use every existing authority available to rein in the for-profit college industry, crack down on predatory student lending, and combat the racial disparities in our higher education system.
 

Dennis in MA

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why shouldn't it be dischargeable in bankruptcy? all your other debt is.
Ummmm, because that was in your loan agreement. Can’t skip on a mortgage either.

why should taxpayers have to bail out Wall St banks who make risky bets, but not bail out students?
Ah jeez. Go look it up and see how much money Uncle made even after the bad debt of Fannie, Freddie and GM/Chrysler made.
 

Varmint

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Ah jeez. Go look it up and see how much money Uncle made even after the bad debt of Fannie, Freddie and GM/Chrysler made.
seriously, do you think the last bailout of the banks was 10 years ago?

Let's see, Thurs 1/16/2020 . . . $35 billion in REPO operations.

Then there's the $4.2 trillion in QE ($22 trillion if you count foreign central banks) and the 10 years of "emergency" low interest rate loans to banks, still ongoing and currently 1.625%. Must be nice for banks to borrow at 1.625% and loan it out at 17% on credit cards, although most of the money just gets put into stocks, bonds and commodity futures.
 

Dennis in MA

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Hmmm. I would argue that the QE was not to help Wall Street or banks or any of that. It was for one reason and one reason only. . . . and here is my conspiracy theory of the week: To make Obama look successful.

It's why he did Crap for Clunkers. It's why Yellen was so resistant to reducing QE. All to make him look good.

And if it was up to me, the Fed would just let all that debt retire. No more repurchases. Rates WILL go up. Sparingly. We proved that in 2009. If there is a hint of economic problems in this world, money FLOWS into T-bills and drops rates. No more repurchase, rates climb a bit, everyone gets nervous, others drop $ into T-bills and rates stabilize.
 

Dench

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seriously, do you think the last bailout of the banks was 10 years ago?

Let's see, Thurs 1/16/2020 . . . $35 billion in REPO operations.

Then there's the $4.2 trillion in QE ($22 trillion if you count foreign central banks) and the 10 years of "emergency" low interest rate loans to banks, still ongoing and currently 1.625%. Must be nice for banks to borrow at 1.625% and loan it out at 17% on credit cards, although most of the money just gets put into stocks, bonds and commodity futures.
They're loving it. The entire investing/credit/loan economy is basically rigged at this point. I haven't been the biggest fan of the plutocracy to be honest.
 

jhblaze1

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Ummmm, because that was in your loan agreement. Can’t skip on a mortgage either.
Does it specifically state in a student loan agreement that you can't get the debt discharged in bankruptcy or are you just vaguely referencing a promise to pay?

The point of bankruptcy is to discharge debt to regain solvency. You promise to pay sure, but the lender accepts risk. When you go bankrupt your creditors realize the risk they accepted.....

Same w mortgage...you can skip mortgage payments and get foreclosed on ....Lender maybe takes a haircut when they flip the foreclosed home. Borrower, in exchange, gets their credit rating destroyed for a decade.

There's no good reason that a student loan should be treated differently than any other loan in bankruptcy is all I'm saying.
 

Dennis in MA

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Except if it wasn't treated differently, lenders would never lend it out in the first place. It's an unsecured loan of tens, if not hundreds of thousands of dollars.

If you skip on your mortgage, eventually the bank gets your house. If you skip on your college debt, can they take your brain???


Keep in mind that prior to 1983 or so, there was no real college debt system. Mom and Dad borrowed against the house if necessary. Thank Congress for altering the whole program and turning it into the biggest boondoggle to move money from the hands of hardworking Americans and putting it into liberal-ass colleges we've ever seen.
 

Dench

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Except if it wasn't treated differently, lenders would never lend it out in the first place. It's an unsecured loan of tens, if not hundreds of thousands of dollars.

If you skip on your mortgage, eventually the bank gets your house. If you skip on your college debt, can they take your brain???


Keep in mind that prior to 1983 or so, there was no real college debt system. Mom and Dad borrowed against the house if necessary. Thank Congress for altering the whole program and turning it into the biggest boondoggle to move money from the hands of hardworking Americans and putting it into liberal-ass colleges we've ever seen.
The current system is a failure. None bankruptable loans are bad ideas. Easy money to teenagers is a bad idea.

Nothing about the current system is good for anyone but banks. Whatever breaks it breaks it. Hopefully sooner than later so we can just get over it and move on.
 

Dennis in MA

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No doubt. All of the money from the student loan programs ended up in college coffers. Huge boondoggle.
 
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Ok. Coming to this thread late, only read about 3 of the 6 pages, but did anyone actually read the article?

This guy did not just declare bankruptcy and get out of his student debt! You cannot do that, nor is that what the article said.

What he did was figure out that he met the requirements to that the loan was causing him undue hardship, and the judge agreed. This was done by applying the Brunner test:
The Brunner test requires three requirements to be met:

  • Debtor cannot maintain, based on their current income and expenses, a “minimal” standard of living for themselves and their dependents if forced to repay their loans
  • Additional circumstances exist indicating that this situation is likely to persist for a significant portion of the repayment period of the student loans
  • Debtor has made good faith efforts to repay their student loans
He had been making payments on his loan over the course of it, but couldn't keep up AND based on current income couldn't pay it back, ever.

As his own atty, he was able to do the filings himself, he estimated that a regular person would wind up paying about 40k (he is in NJ, so maybe it is less say in OH).

The point I am making is that if you owe 40k and just want to get rid of the debt, you are not going to just declare bankruptcy and get it discharged.

This doesn't let anywhere close to a major fraction of student debt be dischargeable by declaring bankruptcy. Just a small %.

On the other hand, there are lots of companies that have loans somehow backed by the govt that declare bankruptcy and don't pay back the loan. Why is that OK?
 
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I kind of feel like my generation has been put in the role of being the defacto bag holder for all the F#@k ups of the boomers and other generations that preceded mine. I graduated from college and entered the work force during the mid 90's recession. Started investing for retirement just as the .com bubble burst in the late 90's. Bought my first house at the height of the housing bubble in the mid 00's and made my last student loan payment last year just prior to all of this student loan debt forgiveness foolishness raised it's ugly head. FML [hmmm]
 

Rob Boudrie

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why shouldn't it be dischargeable in bankruptcy? all your other debt is.
  • Other debt is issued by lenders who willing take bankruptcy risk into account when considering terms and which applicant to accept. The backers of student loans are forced at gunpoint to provide the guarantee that the lender will not take a loss.
  • Student loans are backed by you, the taxpayer, and are given to people who are absolutely not creditworthy for a multi-tens of thousands dollar signature (unsecured) loan. Make $200K a year? Just go to you bank and ask for a $100k no-collateral loan at a low single digit interest rate. Tell then you want the same rate and terms as a student loan.
  • Students who graduate are typically broke, and could optimize their long term wealth with a bankruptcy right out of school when they had nothing to lose but the credit rating. Do you spend that 10 years making payments with all your spare cash to keep the rating clean, or save/invest that money and wait for the waiting to reset in 10 years? Which student do you think will have a higher net worth and be totally debt free in 10 years? The one that did not declare bankruptcy would not only have that decade of savings, but probably still have a loan balance. The moral righteousness such a student would smugly lay claim to plus $50K or so would make a house down payment.
  • Would you buy into a mutual fund that invested by making bankrupcy eligible loans to college students at single digit interest rates? If the answer is yes, you are an idiot. If no, then why do those terms become acceptable when you make such investment via your taxes?
On the other hand, there are lots of companies that have loans somehow backed by the govt that declare bankruptcy and don't pay back the loan. Why is that OK?
It's not. Those loans should have been collateralized, and not available if the only collateral was other than first lienhholder
None bankruptable loans are bad ideas.
That is identical to saying the govt should pay for student loan balances, and there will be no student loans without the guarantee.
 
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PennyPincher

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Where does PMI fit into this scheme?
PMI is what the borrower pays (private mortgage insurance) to insure loans that are not government backed also known as "conventional loans." It is Private Mortgage Insurance and protects the lender. I believe it is only assessed on the amount of the loan that is OVER 80% of the value of the home. Once you pay down to 80% of the value of the home (at the time you purchased it) you can get the PMI removed. Note, you don't usually get the benefit of increasing values in a rising market. So if your home was worth 200k when you bought it, your mortgage balance has to be less than 160k before PMI is removed. If value goes up high enough you could of course remortgage and eliminate PMI.

In government backed loans there is usually a "funding fee" which is actually prepaid mortgage insurance.

 

Dench

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I'm not exactly sure how much staying power the old school (R) mindset establishment is going to have when the Millennial and Gen Y replace the boomers fully. There's a major amount of resentment from both generations regarding this issue specifically. There is always enough money for war but when it comes to fixing programs that are de facto crises no one can or wants to pay to correct it all of a sudden.

It's very easy to blame children for making dumb mistakes. But it's a lie when you blame teenagers for making decisions that their parents and mentors pressured them into.

It's going to be changed along with healthcare.
 

Rob Boudrie

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It is mathematically impossible for any good or service to increase in price faster than inflation in perpetuity, as doing so would result in infinite present value. Try working the numbers.
 

Dennis in MA

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I kind of feel like my generation has been put in the role of being the defacto bag holder for all the F#@k ups of the boomers and other generations that preceded mine. I graduated from college and entered the work force during the mid 90's recession. Started investing for retirement just as the .com bubble burst in the late 90's. Bought my first house at the height of the housing bubble in the mid 00's and made my last student loan payment last year just prior to all of this student loan debt forgiveness foolishness raised it's ugly head. FML [hmmm]
Oh come on. I'm on the other side of 50 from you. You live in the fortunate area to not be "OK Boomer"'d nor "bleeping Milennials"'d.

You started investing at the absolute best time - when things went DOWN.

You bought a house because YOU thought you had to buy a house. That's not Boomer's fault.

As a % of your future income, your cost of college and student loans were paltry compared to today.

You got the best of all worlds. You are smack in the middle and carry no blame from either generation.
 
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It is mathematically impossible for any good or service to increase in price faster than inflation in perpetuity, as doing so would result in infinite present value. Try working the numbers.
Don't be telling Draft Dodging Donny about this. Just keep cranking up the deficit and debt. Those tax cuts will have a YUUGE increase to our GDP and will lower the deficit.
 

jhblaze1

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Except if it wasn't treated differently, lenders would never lend it out in the first place. It's an unsecured loan of tens, if not hundreds of thousands of dollars.

If you skip on your mortgage, eventually the bank gets your house. If you skip on your college debt, can they take your brain???


Keep in mind that prior to 1983 or so, there was no real college debt system. Mom and Dad borrowed against the house if necessary. Thank Congress for altering the whole program and turning it into the biggest boondoggle to move money from the hands of hardworking Americans and putting it into liberal-ass colleges we've ever seen.
You're kind of getting at the whole problem with student loans...a racket the gov't never should have gotten involved in. subsidized loans drove up the cost, requiring more loans....classic bubble. I'm not sure the solution is to just totally f*** the borrowers though. They're not the only party at fault. Taxpayers shouldn't be on the hook for it.....but perhaps once the bubble inevitably bursts, the system can be replaced with something less stupid....not holding my breath.

It's unsecured debt....so no they can't take your brain. But historically, well educated people generally do pretty well in life. So in lieu of collateral they have that "faith" I guess for lack of a better term. Most people don't go bankrupt and most people don't renege on their student loans (default rates are under 10% and I bet we can guess the majors of the people who defaulted)

Most courts don't just approve bankruptcies without proof that the debtor is truly insolvent...so I don't really think lenders would get out of the game just because borrowers could get bankruptcy protection...rather they'd price that slightly higher risk into their underwriting models. Maybe lenders should only lend if a student is in a certain major....no loans for Lesbian Dance Therapy majors, STEM and business only....A LOT of this is the bank's and gov't's fault for making stupid loans in the first place.
 

PennyPincher

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BTW, the court DIDN'T rule that all student debt is dischargeable. The provision to discharge student loan debt has been in place "forever." It's just difficult to get this ruling, partly because it's expensive to have an attorney file under the part of the code to get student loans discharged and usually those in bankruptcy don't have the funds to pay for that added process. The article stated somewhere around $10k in addition to what a "normal" filing would cost (and possibly more). I actually don't think the bar to get that debt discharged is all that high looking at the article as it really boils down to "simple math." Any experienced attorney in bankruptcy should be able to advise their client what the "acceptable expenses" vs income would be in order to meet this bar.
 

Varmint

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Hmmm. I would argue that the QE was not to help Wall Street or banks or any of that. It was for one reason and one reason only. . . . and here is my conspiracy theory of the week: To make Obama look successful.

It's why he did Crap for Clunkers. It's why Yellen was so resistant to reducing QE. All to make him look good.

And if it was up to me, the Fed would just let all that debt retire. No more repurchases. Rates WILL go up. Sparingly. We proved that in 2009. If there is a hint of economic problems in this world, money FLOWS into T-bills and drops rates. No more repurchase, rates climb a bit, everyone gets nervous, others drop $ into T-bills and rates stabilize.
good post, didn't have time to answer it.

I used to think the same - especially when the Fed started jacking up rates after Trump got elected. Then in early 2019 they did a complete about-face - when a little more twist of the knife would have screwed Trump, and the masses would probably have had no clue. Now that the Fed is using QE4 just to keep hedge funds well funded, it should be obvious that they're doing it to keep the stock market inflated - not for any political reasons, although Trump wants the stock market propped up as well.

If the Fed let REPO rates go to 10% overnight, and stay there for 3-4 days, you'd have not just hedge funds but big companies going out of business by the 4th day, unable to pay their bills. That would crash the stock market. So the days when the Fed could step back and let things play out, like they did in 2000 after Y2K, are long gone - yes, if they let rates go up, money might flow into bonds - but the massive debts would start defaulting, triggering a landslide of defaults that would crash the financial system in like a day.

So look forward to more QE, more emergency stimulus, lower rates, probably negative rates. It'll start next time the stock market corrects 20%.
 

Varmint

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I'm not exactly sure how much staying power the old school (R) mindset establishment is going to have when the Millennial and Gen Y replace the boomers fully. There's a major amount of resentment from both generations regarding this issue specifically. There is always enough money for war but when it comes to fixing programs that are de facto crises no one can or wants to pay to correct it all of a sudden.
I totally agree with the millenials on this one - we happily fund risky investments by Wall St. banks or big corporations, but suddenly get all "moral hazard" when it comes to loaning money to students. It's become completely obvious that there are two sets of rules in the global economy - one for the rich and big corporations, another for the dumb sheep. Big bank taking wild bets and too big to fail? You get 1% interest loans (even negative rates in Europe). Peon with perfect credit? Here's a 19% credit card.

Well, the dumb sheep are starting to riot all across the world, and it's coming here soon.
 

Varmint

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It is mathematically impossible for any good or service to increase in price faster than inflation in perpetuity, as doing so would result in infinite present value. Try working the numbers.
Which inflation number should I use, Rob? The real inflation number, or the phoney one the Fed provides us?
 
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