Before I start, I want to note that I claim no special expertise on this subject. Bankruptcy law is not my area, even though IAAL. I’m interested in debating policy about what the law should be, and not the fine points of what the law is today.
Background: Even with the recent changes, current U.S. bankruptcy law allows the discharge of most debts. There’s no overall requirement that the debtor be deserving in a moral or intellectual sense. As a rule, even if your own stupidity, foolishness or negligence caused or contributed to your state of indebtedness, your debts still may be discharged, and you get a fresh start.
The policy is well-rooted in American law and society. The power to adopt a bankrupcty law is expressly granted to Congress in the Constitution, and debtors’ prisons on the old British model were abolished by Congress over 200 years ago.
There are exceptions to discharge. For example, certain fraudulently obtained loans and child support obligations are nondischargeable. Since at least 1998, student loan debts have also been nondischargeable.
At the time, I supported this change in the law. I had paid my student loan debts, and had kept them low to begin with by being extremely frugal while in school, by saving before college, and by working during the summers and (to some extent) during the school year. I also personally knew of other students who had blown their loan money on spring break trips and expensive stereos, and I had read newspaper articles where newly-minted physicians escaped their student loans through bankruptcy before beginning their lucrative professional careers. The change in the law seemed obvious. Unlike most loan situations, a student loan receipient was expected to be in the red (overall), with no immediate source of income. Virtually any recent grad qualified for discharge under the old law.
Now, I’m not so sure. Some commentators think that the pendulum has swung too far the other way. See, for example, this article: http://moneycentral.msn.com/content/Savinganddebt/Managedebt/P107758.asp
I’m aware of 3 people who are (or were) in situations similar to that described in the link – faced with a student loan debt that they cannot ever pay, barring a lottery win, or inheriting from a rich relative. None of these people are stupid, at least not in a general sense. Unlike the subject or the article, all three graduated with a college degree. (In fact, all 3 have 2 degrees – with a postgraduate degree in two of the cases.)
In the descriptions that follow, I’m going to avoid personal information and might change an unimportant detail or two to protect privacy, even though I don’t consider any of the three be be clients. (The relationship in each case is or was social, rather than professional.)
Person A. A is intelligent, and received a professional degree. A did nothing particularly stupid with the student loan money. However, A attended a private school in a large urban area, and lived in an apartment during years of school. With rent and tuition, upon graduation, A had over $50,000 in student loan debt. A’s profession, although potentially lucrative, does not always pay very well to start, and graduates sometimes cannot find a job right away. This was true of A. Except for a couple short-term temp jobs, A did not find employment for over a year. A also is somewhat math-challenged, and not particularly financially able. Perhaps for these reasons, A did not take advantage of some deferral options, and accordingly went into default. 18 months later, although finally employed, A was about $65,000 in debt due to penalties and interest.
A was lucky, though. Although the first job didn’t pay enough to support A and also make payments on the loan, A got some help from the parents, and a new personal relationship evolved into a live-in sitation, and A’s SO paid most of the household bills. Two years of this allowed A to keep current on the minimum payments. Still, though, a significant chunk of A’s net pay would have gone for the loan, for decades. Without the SO and family help to pay other expenses, repayment would have been doubtful. A eventually got a windfall (inheritance from a distant relative) and repaid the loan.
Person B. B was a long-time student. B.S., then M.A., a brief interval working a low-paid job, then years of pursuing a doctorate in a liberal arts field. Eventually, for reasons that I am not completely clear on, B’s dissertation was rejected, although all coursework was successfully completed. Even with a PhD., this field isn’t lucrative. The best B could have hoped for was a scarce assistant professor spot. There’s no private employment option. Without the PhD., even this small chance of an academic position disappeared. B lived extremely frugally during 12 years of school, but living expenses add up, and A now owes more than $100,000. B has no chance of even making payments that cover interest. B is 45, and has no prospect of any job paying more than $30,000 a year. Even that is questionable. B will be dealing with collection calls, and wage garnishments, for life. This loan will never be repaid. Unlike A, who had at least one wealthy relative and some social relationship prospects, B does not.
Person C. C grew up in a low income family that wasn’t tremendously stable. C’s original academic career had some interruptions, but eventually resulted in a B.S. from a well-regarded school. Unfortunately, the degree was in a liberal arts field that wasn’t in demand in the job market. Eventually, C realized this, and successfully obtained another degree in a marketable area. It’s not highly-paid, though.
C also is math and financially challenged, and apparently didn’t take full advantage of deferral and other loan repayment options that were available at various times. It is possible that some of the original loan proceeds were not wisely spent, but I don’t know this for sure. It appears that most of C’s current balance is actually accrued interest, penalties, and collection charges. Although I didn’t know C at the time, I suspect that C ignored loan payments from the first degree while pursuing the second degree. I am personally and professionally aware that Sallie Mae and other student loan agencies are not always helpful and accurate, so this may have contributed to C’s poor decisionmaking at the time. C’s current balance is well over $100,000. C’s annual income is not sufficient to pay reasonable living expenses and cover the interest on this loan. (C is stuck paying a high rate of interest on the main loan, because further consolidation is allegedly not available because of a default history.)
Like B, C has no wealthy relatives, and will never be able to repay the loan.
I don’t think these stories are all that unusual. So, although I’m strongly in favor of people paying their debts, I also don’t like the idea that poor (but non-criminal) decisions by people in their 20’s can result in an inescapeable lifetime of debt and dodging calls from Mr. Jones at the Acme collection agency. Also, wage garnishments don’t do much to improve one’s job prospects. A, B and C would have been better off if they blew the money at the track, rather than on college educations. Something’s not right about that, yet the 1990’s era change in the bankruptcy law addressed a real problem.
So, should the law be changed?