student loans in court

Life for a Student Loan Borrower in Court

Michael Lux Blog, News, Student Loans 2 Comments

On Monday the 7th Circuit Court of Appeals published its decision in a student loan case.  The issue before the court was a boring procedural matter, so this particular case didn’t generate much attention.  However, a review of the facts of this case shows some of the absurdity of dealing with student loans in the courts.

What Happened?

The Plaintiffs, Frederick Greene and his wife, filed for bankruptcy in 2005.  Among their debts were a large quantity of student loans.  Though the Greenes were able to get all of their other debt discharged in the bankruptcy, the student loans were left in place.  The Court would not discharge the student loan debt because the Department of Education had not yet attempted to collect the debt.

From a legal standpoint, the logic behind the Court’s inaction makes sense.  The Courts are extremely busy and they are very careful not to litigate issues that only “might” happen.  Basically, the case needs to be ripe for judicial review.

The problem with the Court’s 2005 inaction is that Mr. Greene and his wife were sticking with a ticking time bomb.  The fuse was lit the moment those student loans were generated and it was only a matter of time before the debt collectors came calling…

In 2010 the Department of Education began collecting Mr. Greene’s wages.  With the issue now ready for review before the Court, Mr. Greene initiated proceedings to have the student loan debt discharged.  The Department of Education filed a counterclaim demanding that the debt be repaid.

Instead of getting his student loan debt discharged, Mr. Greene lost his case to the Department of Education.  Not only was the debt not discharged, but the Department of Education received an order from the Court ordering Greene to pay back the debt.  Because Greene brought the second lawsuit and lost, the Department of Education, now armed with a Federal Court order, enhanced their ability to collect the debt.

What does this mean for borrowers?

For starters, it is worth noting that the opinion is written by Judge Posner.  He is highly regarded among legal scholars as one of the brightest legal minds, especially when it pertains to matters of economics.  His opinions and insights are likely to carry more weight within the legal community when compared to other Court of Appeals decisions.

Many bankruptcy attorneys may look at the eventual outcome for Mr. Greene and advise future clients that in some circumstances it may not be worth their time to pursue a discharge of their student loan debt.  They can point out the fact that this Plaintiff was left in a worse position with his student loans because he took his lender to court.

The decision does not provide enough information to fully access the financial situation of Mr. Greene and his wife, but one fact sticks out.  The Court found that Mr. Greene should have all of his debt discharged, except for his student loans.  In this case, like many others, student loan debt was treated differently than all the other types of debt.  The Court found that Mr. Greene deserved a break from all of his other debt, yet ordered that he pay back every penny on his student loans.

The bottom line here is that the law currently makes discharging student loan debt in bankruptcy very difficult.  The experience of Mr. Greene and his wife over the past decade only serves to further prove this point.

  • It is well known that student debt cannot be discharged in bankruptcy. Any attorney should have advised their client to not waste their money on the lawsuit. Not only did he have to pay it back, but there was a lot of additional interest and add the costs of the lawsuit too.

  • Agree with Krant. This is something that’s well known and while perhaps they were trying to set precedent, I believe that in the 2000’s when loan companies associated with federal loans agreed to lower rates, they insisted on the provision to continue this and even strengthen the law. It’s going to be a tough hill to climb to get it to change as I would expect it would lead to defaults along the lines of the foreclosure crisis we had a few years ago should that restriction be lifted.