Student Debt in Bankruptcy, Part 1: Debts Owed Directly to the Registrar

In my practice I’m often faced with questions about college loans and other student debts. Typically in the business of being a bankruptcy lawyer we focus the bulk of our attention, when representing consumers, on credit cards, mortgages and medical bills.  The sad truth is, however, that the largest amount of unsecured consumer debt is not credit cards, but education debt.  In fact, when comparing all types of consumer debt, including secured debts, the only category of debt that eclipses student debt is mortgage debt.  Student debt in the United States has recently eclipsed One Trillion Dollars. Trillion. That’s a one with 12 zeros: $1,000,000,000,000. The U.S. Department of Education’s most recent data reflects a 14.7% default rate for loans beginning repayment in 2010 (the Education Department’s standard for measuring defaults), up from 13.4% a year earlier. By comparison, according to the Federal Reserve only 8.21% of residential mortgage debt is in default, and only 2.39% of credit cards debt is in default.  

To me it is clear that there is a problem.  More problematic, mortgage debt (at least the personal liability under the mortgages) and credit card debt can almost always be discharged in a personal bankruptcy under Chapter 7, Chapter 11, Chapter 12 or Chapter 13. Conversely, except in rare circumstances student loans are not dischargeable in bankruptcy.  The circumstances under which a student loan can be discharged is a topic I will cover as part of this series of posts on Student Debt in the coming weeks.

While it is quite difficult to discharge a student loan, it is important to fully understand what is a student loan and what is not a student loan.  Most of my clients come to me with a slew of debts. Among those debts are often hidden bits of debt that we can discharge, but that clients mistakenly believe are not dischargeable – such as some income tax debt and some debt related to education.  This is another example of why it so important that you reveal ALL DEBTS to your bankruptcy attorney so that he or she can fully evaluate your situation in order to give you the best chance at a fresh start.

One of these gems are debts owed directly to the school. That is, debt incurred directly to the registrar at the college, rather than via a third party loan. This sort of debt can be quite challenging in its own right, but there is nothing about it that is unusual and it can be discharged in your personal bankruptcy, as long as it is listed in your personal bankruptcy.  More importantly, colleges often will withhold a transcript – making it difficult if not impossible to transfer credits to another institution and complete your college degree.  However, post-bankruptcy discharge, there is no debt remaining. The institution simply has no right to withhold a transcript post-discharge. In fact, I take the postition that withholding a transcript after the debt is discharged is a violation of the discharge order and have successfully demanded release of the records.

But beware, bankruptcy courts have found that certain debts owed to a college directly can be deemed to be a student loan, and thus not dischargable.  For instance, in 2009 the Ninth Circuit Court of Appeals found that where the college and student entered into a deferred payment agreement, because the debt was essentially structured like a loan, it would be treated as such for bankruptcy discharge purposes.  Essentially, if it looks like a duck and quacks like a duck… its probably going to be treated like a duck.  At least in the bankruptcy court.

If you are struggling with debts, including student or education debt, schedule a free consultation with an experienced bankruptcy lawyer who cares about his clients today.  Contact the Law Offices of James Wingfield at 508-797-0200, visit the contact page on our website or fill out the form below to email me directly.