Should student loan debt be forgiven in bankruptcy?: The average law school debt in Michigan is about $80,000, and taxpayers are the creditors

By Tom Gantert Legal News Jackson attorney Phillip Berkemeier said that when he handles a bankruptcy case, a frequent question he gets is whether student loans can be included among the debt to be discharged. "I tell them, 'So far it's been next to impossible and it hardly ever happens,'" Berkemeier said. However, there may be some hope for people saddled with student loan debt after the Seventh Circuit Appeals Court in Illinois ruled that a destitute paralegal could include her $25,000 in student loans in her bankruptcy filing. Circuit Court Judge Daniel Anthony Manion wondered in his comment on the ruling what impact the case would have. "But with many people struggling to make payments on their loans, will they see in this case and perhaps others like it an excuse to avoid their own student-loan obligations?" Manion asked. Many Michigan lawyers have accumulated student loan debt much higher than Susan Krieger, the 53-year-old Illinois paralegal who was allowed to discharge her $25,000 in student loan debt with the Circuit Court ruling. Ann Arbor's Applied Statistics Laboratory issued a 2011 report that found that average law-school related debt in Michigan was $80,825 for private practitioners and $78,616 for non-private practitioners. According to the April 10 ruling, Krieger was destitute. A creditor asked the bankruptcy judge to exempt her student loans from discharge. A bankruptcy judge ruled that Krieger had met the standards to have her loans included in her bankruptcy. Krieger lives with her 75-year-old mother in a rural area with few jobs available. They live off an income of a few hundred dollars a month from governmental programs. Krieger lacks Internet access and her decade-old car needs repairs. She is 53, and has not held a job since 1986 when she left a job to raise a family. In 2000, she earned a paralegal certificate and graduated with a Bachelor of Arts in Legal Studies from Webster University in Missouri. The creditor claimed Krieger had only applied for 200 jobs in the past decade. Krieger could have found work outside of a paralegal position, the creditor claimed. The bankruptcy judge noted that Krieger had used much of her divorce settlement to pay off a few thousand dollars of her student loans, leaving a balance of $25,000. A district judge reversed the decision. The district judge said Krieger could have looked harder for a job and hadn't enrolled in a program that would have allowed a 25-year payment schedule so that eventually, she could have paid it off. The Seventh Circuit Court of Appeals states that no college loan could ever be discharged in bankruptcy if the standard included the ability to pay it off at some point in the future. The court's decision cited a Chicago Tribune article that stated Equifax National Consumer Credit Trends Report that banks wrote off $3 billion of student loan debt in the first two months of 2013 and outstanding student loan debt in the U.S. is approaching $1 trillion. Ypsilanti Attorney Kathleen Brown Torrella said that since Michigan is in the Sixth Circuit Court of Appeals, the Seventh Circuit Court ruling would only have persuasive authority. "Monies owed the government are sometimes the hardest to discharge," Torrella said. "For example, income tax debt is usually not dischargeable, but there are some exceptions." In the case of student loans and tax debt, it is the taxpayers that are the creditors, she said. "Who is going to mind our store? I don't want to fund all this delinquent money," Torrella said. "So, from that standpoint, I would hope that the floodgates are not going to open to discharge a lot of debt. ... The legal field, we all know, is flooded. If people want to assume the risk and take on loans, fine. But on the whole, the consequences of the risk should be on them and not all the taxpayers." The area of student loans has many areas open for debate, she said. "Should we do like some Europeans and use a testing system for students to get into college, then provide a free or very low-cost education to those who test well? Should the pipeline of graduates be more tightly controlled? Should college administrators earn salaries of hundreds of thousands of dollars, thus inflating tuition? If the numbers and quality of graduates were more narrowly tailored to fit opportunity, and if expenses were held in check, maybe we could curb these problems in the first place. In extreme cases, I think any kind of debt should be discharged." "I think we are going to see more and more of it," Berkemeier said of people trying to get out of their student loans via bankruptcy. "There are just so many young people saddled with these student loans that are having hard luck with their employment opportunities.... Student loans are a big, big problem and they are lurking out there." But Berkemeier was not convinced that the Seventh Circuit ruling would provide much relief. "It's rare and it's hard to do," he said. Published: Thu, Jun 6, 2013

––––––––––––––––––––
 Subscribe to the Legal News!
 http://legalnews.com/Home/Subscription
Full access to public notices, articles, columns, archives, statistics, calendar and more
Day Pass Only $4.95!
One-County $80/year
Three-County & Full Pass also available