Even though you don’t know Richelle, you’re familiar with her story. She’s you. She’s your aunt. She’s your friend. Because of that, I won’t tell you her whole story. I’ll stick to some highlights.
She was born in St Louis. Lived here all her life. Graduated from high school. Attended St Louis Community College so she could be close to family. Graduated. Had a kid. Never married. Didn’t get the job or the income she thought. Struggled to pay her bills. Filed bankruptcy. And then things got worst.
After she filed bankruptcy and cleared most of her debts, the sheriffs knocked on her door.
She was being sued. By who?
National Collegiate Student Loan Trust.
A $30 thousand loan she borrowed from Chase Bank’s Education One Loan program while in community college.
In the years since she left college, the balance owed had grown to $47 thousand.
She couldn’t afford to pay that. She couldn’t afford to be garnished. She has to take care of her daughter.
She needed help.
She called me.
Here’s what we did.
You may not have to prove undue hardship to get rid of a student loan in bankruptcy
When it comes to bankruptcy and student loans, people automatically assume that student loans aren’t dischargeable.
And generally, that’s true.
It’s really friggin’ difficult to discharge student loans. It doesn’t matter what test is used, Brunner or totality-of-the-circumstances or certain hopelessness, getting rid of student loans is an incredibly rare. But what if you could avoid those tests altogether? What if you could get rid of your student loan by proving it’s not really a student loan?
Wouldn’t that be easier?
We were about to find out.
Just because it says it’s a student loan don’t mean nothing. Prove it.
Not every loan made to you while you were in school is a student loan for purposes of dischargeability. There must be something different about that debt. Because if there isn’t, then you couldn’t get rid of any any debt you incurred while in school.
In bankruptcy, that difference comes down to one of three things:
- Who made the loan
- Who funded the loan program the loan was made under; and
- Whether the loan was more than what you needed to pay your school’s cost of attendance.
Let me explain.
Who made the loan
For most of you, the government either made or guaranteed your educational loans. Doesn’t matter if the loan is Stafford, subsidized, unsubsidized, Perkins, HEAL, Direct, or FFEL. The government was involved in those loans. And because of that, you have to prove undue hardship to get rid of it.
Who funded the loan program
Some of you — usually teachers — have Perkins loans. Those loans are federal loans. But the government doesn’t make them. That is to say, you don’t borrow the money from the government directly. You borrow it from the school. And that school is typically a registered nonprofit organization (think state colleges and universities and many private colleges and organizations). Because your loan was made under a loan program (Perkins loan) funded by a nonprofit (that is, your school) you’ll have to prove undue hardship to get rid of it.
We’ll come back to it in a moment.
More than your cost of attendance
Lastly, a loan is a student loan for bankruptcy purposes if it was made solely to cover your cost of attendance and your school was eligible to receive federal financial aid.
When you think of cost of attendance, think more than your tuition. It includes your room and board, transportation cost, books, etc. That total cost is set by the school irrespective of your actual costs. The school looks at its full-time students and says, “It should costs them X to attend here.” The school does the same for its less than full-time students as well. Because that costs is set by the school, any student loan that exceeds that costs is not a student loan in the bankruptcy world.
Back to Richelle
The Chase loan she borrowed and that National Collegiate was suing her for called itself a student loan. But I wasn’t convinced. I mean, it wasn’t made or guaranteed by the government. Nor was it made under a program funded by a nonprofit (more on that in a sec). Nor was it solely for her cost of attendance.
Her community college set her cost of attendance at less than $2 thousand. So basically, the loan was for 15x what it costs her to go to school.
At this moment, you’re probably thinking, “Why the hell did she borrow so much money?”
Short answer: she made a dumb ass financial decision.
I told her that. But I didn’t have to. She already knew.
But here’s the thing, it shouldn’t matter whether she acted foolishly in borrowing so much. Nor should it matter the bank acted foolishly in lending so much to someone at a community college who was working part-time for $10 per hour. What should matter — scratch that — all that matters is whether the Chase loan was one of those three things. In my mind it wasn’t.
So we sued.
To try and get rid of the loan, we had to file an adversary proceeding in her bankruptcy. Because she had already filed bankruptcy, she didn’t need to file bankruptcy again. We just needed to ask the court to reopen her case so we can file a lawsuit to declare the loan dischargeable.
The court let us. So we did.
Our argument was straight-forward. Chase is a for-profit lender. The loan was not guaranteed by the government. It was not made under a program funded by a nonprofit. And it was not solely for her cost of attendance.
National Collegiate responded with some creative arguments. They said that the loan was indeed funded by a nonprofit because a nonprofit guaranteed loans made under the Education One Loan Program. Basically, they said guaranteed and funded mean the same thing. Two different words. Two different definitions. But, you know, same thing.
In the words of Jay-Z,
They also argued that it didn’t matter the loan was for 15x her cost of attendance. What mattered, they argued, was that the purpose of the loan when it was made was to pay for educational costs. That her cost of attendance was already covered with grants and other aid was irrelevant.
Again, in the words of Mr. Carter, “Okay.”
So what happened?
The bankruptcy judge’s decision
After getting our lawsuit and National Collegiate’s answer, the judge ordered us both to file motions for summary judgment. That way, he could decide the lawsuit without holding a trial.
Thirty days later, we both filed our motions.
Almost 9 months later, the judge made his decision.
We lost because in the judge’s opinion, a nonprofit had funded Chase’s Education One Loan Program. But not because a nonprofit guaranteed loans made under the program. Nope. The court wasn’t concerned with that. Instead, the court said that a nonprofit funded the loan program by possibly receiving some of Chase’s mail.
Don’t believe me? Read it for yourself. The relevant part starts on page 9.
To tell the truth, the outcome didn’t shock us. We expected to lose. The truth of the matter is that bankruptcy judges, for what ever reason, appear to be hostile to people discharging their student loans in bankruptcy.
What we didn’t expect was to lose for the reason we lost: a nonprofit possibly received some of Chase’s mail? Poppycock.
So we appealed to the bankruptcy appellate panel for the 8th Circuit.
That was about 2 months ago.
The panel ordered us both to file a statement saying whether the parties desired oral argument. We said yes. National Collegiate said no. The panel hasn’t told us one way or the other…yet.
I’ll keep you updated.