Most folks who file bankruptcy end up doing so because they’ve incurred sky high medical bills. (The second most common cause is the loss of a job.) And, when you file bankruptcy, you are asking the court to approve a payment plan to settle your debt (ranging from pennies to quarters on the dollar)- or, dependent upon your income and assets, to completely rid you of debt. Of course, you now have a seven year to ten year scarlet letter on your credit history. And, most employers (unless and until this practice is outlawed) check your credit history before offering you that new job.

But, there are some debts from which you cannot be discharged. Since one of my myriad hats is as a tax advisor, I should let you know that current tax debt is among the debts that can’t be discharged. And, if you were foolish enough [as a corporate officer or self-employed individual] to skip those payments required for Social Security and Medicare, you can rest assured they will never be discharged in bankruptcy.

Another debt that never gets discharged? Student loans. Which may explain why so many baby boomers have significant debt to their names. Those loans they took out to put their kids through school (PLUS loans). Oh, sure, you will hear that some folks got them discharged. But, to get that condition to hold takes very, very special circumstances.
And, until recently, that also meant loans folks took out to study for the bar or their medical boards. These loans- that range from 10 to 20K in size- were offered by banks and finance companies because they were fairly certain the debtor would be receiving some very high salaries soon enough.

But, given that there is a glut of lawyers- all of whom have received legal training- it was only a matter of time before there would be a special exception offered.
And, Judge Carla Craig of the US Bankruptcy Court (Chief Judge, Eastern District, Brooklyn NY) just ensured that exception became the rule. She issued her ruling on the Chapter 7 case filed by Lesley Campbell.

Campbell graduated from Pace University (across the river from my alma mater, Brooklyn Poly) in 2009. She borrowed $15K to study for the bar exam (and to cover living expenses while she did so.) But, Campbell never passed the bar and has a much lower paying job that rendered it difficult to pay her bill. (She filed for Chapter 7 bankruptcy in 2014; her total indebtedness crept up to $ 300K.)

These bar study exams are identical to residency/relocation loans that med students employ. Those loans help new med school graduates relocate to their new locations, study for their med boards, and ease the transition to first year residency (aka internship).

Craig’s ruling may only apply to the Eastern District, though. Because Judge Jack Cadell (Alabama District, US Bankruptcy Court) held in 2010 that a $ 9475 bar study loan could not be discharged in bankruptcy. And, SCOTUS (the Supreme Court of the United States) just refused to hear a case about excusing student debt in bankruptcy.

By the way, President Obama is examining ways to change the rules for student debt. Not the debt that is owed to the federal government, but the debt for student loans made by commercial loans and private lenders. (This change- which may or may not come about- would put the loans on the same footing as mortgages and credit card debt. In other words, dischargeable in bankruptcy.)

There also are a few judges who know that some of the circumstances around student debt have changed.  And are waiting for just the right case that will allow them to change the dischargeability of student debt.  (That case will also require a special kind of lawyer, one like my brother, a well-respected bankruptcy attorney.  I’ve invited him to continue the discussion on bankruptcy, which will appear tomorrow.)

Share this: