Upon graduating from law school, 27-year-old Mr. Bob Richardson faces the realization that he will now have to begin repaying the $50,000 student loan that he took out to finance his education. In addition, he will have to continue making the monthly payments on the credit card bills that he racked up while in school. He is unmarried and has no children. Originally, Bob thinks that repaying the loan and his other bills will not be a problem. He expects to get a high-paying job with a prestigious firm in the city and that easily will allow him to make the $300 monthly payment on the loan as well as pay off his credit card debts. Unfortunately, things do not go as Bob has planned. Not only is he passed over by the prestigious firm that he has hoped to join, but he also cannot find employment with any other large, well-known firm. As a result, Bob opens his own practice in his hometown, but he does not get much business. It seems that most of the town's people are content to let the established lawyers handle their legal matters.
Within six months, with few clients and little money coming in, Bob finds himself strapped for cash. Soon, he cannot meet all of his financial obligations. He thinks the matter over for a while and eventually decides to file for Chapter 7 bankruptcy (liquidation) to try to get a new start. At this point, Bob recognizes that his student loans are taking a significant toll on his pocket book. He wants to be rid of these loans to start over. The problem is that he also realizes that, with a few rare exceptions, even in bankruptcy proceedings, the law prevents student loans from being discharged.
At a hearing, the judge explains the law concerning the discharge of student loans in bankruptcy cases. According to the judge, student loans may only be discharged if they create an undue hardship for either (1) the petitioner or (2) his or her dependents. Finding that no undue hardship exists, the judge refuses to discharge his student debts. This means that if Bob only pays the required $300 per month, he will be paying off this loan for 25 years. Although his loan was for $50,000, because of the interest that accumulates on it, by the time that he is finished paying it off, it will have cost him about $90,000.
Chapter 7 -- The chapter of the Bankruptcy Code providing for "liquidation," that is, the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors. In order to be eligible for Chapter 7, the debtor must satisfy a "means test." The court will evaluate the debtor's income and expenses to determine if the debtor may proceed under Chapter 7.
discharge--A release of a debtor from personal liability for certain dischargeable debts. A discharge releases a debtor from personal liability for certain debts known as dischargeable debts and prevents the creditors owed those debts from taking any action against the debtor or the debtor's property to collect the debts. The discharge also prohibits creditors from communicating with the debtor regarding the debt, including through telephone calls, letters, and personal contact.
- Student Loan Syndrome: Discussion Questions
- Identify some decision points at which Bob made his financial situation worse, or points at which he could have made it better?
- The judge in the video stated, "Just getting a professional degree is not a solution if you are not paying attention to what you are doing with your money." What other options were available to Bob besides getting his professional degree at the cost of heavy borrowing?
- What safeguards should Bob have put into place to protect his finances--and avoid the risk of facing bankruptcy--before law school? During law school? After law school?
- What are some financial pitfalls/surprises that Bob should anticipate and prepare for at this stage in her life?
- Before considering bankruptcy, what are some other options available to Bob?
- Why was Bob not able to get his student loan forgiven? What do you think constitutes "undue hardship"? Why do you think the judge ruled the way that he did?
- What other kinds of debts cannot be discharged?
- What are the short-term and long-term consequences for Bob of filing for bankruptcy protection?
- Points to Look for in Student Responses to Discussion Questions
The scenarios and questions are meant to stimulate critical thinking and discussion about life decisions that bring people to bankruptcy court. This answer key begins to address the issues raised; however, it is by no means exhaustive. Students are encouraged to be as specific as possible in their analysis.
- Scenario 3: Student Loan Syndrome Discussion
- Bob made his financial situation worse at the following decision points (1) financing his law school education with a $50,000 student loan; (2) using credit cards inappropriately and excessively while in undergraduate school; and (3) refusing to take any job other than one with a high-paying firm when he graduated from law school. He could have made his financial situation better by (1) considering postponing his legal education until he had his finances under control; (2) controlling his credit card use and paying off his credit card debt before entering law school; (4) limiting his credit card charges to what he could pay within one billing cycle; and (5) taking a job with another firm or agency upon graduation.
- Some other options that were available to Bob besides getting his professional degree at the cost of heavy borrowing include (1) working a few years in a law-related field between undergraduate school and law school; and (2) postponing his legal education until he had his financial situation under control.
- Some safeguards that Bob should have put in place to avoid the risk of bankruptcy before he went to law school include (1) staying current with his credit card payments while in college, and (2) assessing his financial situation before going to law school. During law school, he could have reduced his credit card use. After law school, he could have taken a legal job that would have allowed him to make good on his financial obligations.
- Some financial pitfalls/surprises that Bob should anticipate and prepare for at this stage in his life include (1) the possibility that won't be hired by his first-choice law firms, and (2) the possibility that finding employment may take more time than he expects.
- Before considering bankruptcy, some other options that are available to Bob include (1) getting a job that will allow him to meet his financial responsibilities; (2) scaling down his standard of living; and (3) contacting his creditors to see if they would be willing to work out payment plans with him directly without the involvement of bankruptcy court.
- Bob's student loan was not forgiven because such debts cannot be discharged unless the debtor can prove that repaying the student loan would impose an undue hardship on the debtor.
- The other kinds of debts that cannot be discharged include:
The most significant consequence for Bob is that he will have to repay his $50,000 student loan in full. If Bob does not pay, the creditor (whether the federal government or a private financial institution) may use a variety of methods to try to collect this debt, for example, suing Bob and then (assuming it wins) garnishing his wages to enforce the court's judgment. Because he filed for Chapter 7 bankruptcy (liquidation), all of his nonexempt property could be sold by the U.S. trustee to satisfy his other debts. Some long-term consequences for Bob include damage to his credit rating for 10 years. This may adversely affect him when he applies for credit, rents/buys a house, and seeks future employment.
- Income taxes for the three years preceding the bankruptcy filing;
- Fraudulently incurred obligations (that is, providing a creditor such as a credit card company with false or incomplete financial statements);
- Certain domestic obligations, such as child support and alimony;
- Debts arising from the debtor's willful and malicious injury of person or property; and personal injury obligations incurred as a result of the debtor's driving while intoxicated.