The Student DebtCropper System: Even the Destitute Hounded by Debt Collectors

(Photo: Cory M. Grenier / Flickr)As most people who have passing familiarity with student debt in the US know, it’s a millstone that is brutally difficult to remove. But it turns out that even the limited ways out are often not available in practice thanks to the hyper-aggressive conduct of a critical government contractor.

Unlike every other type of obligation save child support and criminal penalties, it can’t be discharged in bankruptcy. The lone type of exception is “undue hardship”: when a borrower is so clearly incapable of ever paying that it’s ridiculous to keep pressing them for the money.

The undue hardship standard is very difficult to meet, so one would think given how stringent it is, and therefore the comparatively small number of cases that are involved, that the student debt collectors would accept this minuscule level of losses and focus their resources on people with means.

But it instead seems that the debt police are unable to contain themselves. A New York Times story discusses bankruptcy court abuses by the organization that is the main contractor to the Department of Education on these cases, the Educational Credit Management Corporation:

A review of hundreds of pages of court documents as well as interviews with consumer advocates, experts and bankruptcy lawyers suggest that Educational Credit’s pursuit of student borrowers has veered more than occasionally into dubious terrain. A law professor and critic of Educational Credit, Rafael Pardo of Emory University, estimates that the agency oversteps in dozens of cases per year.

Others have also been highly critical.

A panel of bankruptcy appeal judges in 2012 denounced what it called Educational Credit’s “waste of judicial resources,” and said that the agency’s collection activities “constituted an abuse of the bankruptcy process and defiance of the court’s authority.”

For a group of bankruptcy appeal judges to make a public statement of this sort is extremely unusual and strong evidence that the critics are on solid ground. The Times starts with a case of Stacy Jorgensen who had $43,000 of student debt as well as large medical bills due to fighting pancreatic cancer. When she filed for bankruptcy, Educational Credit’s position was tantamount to that she had to be a terminal case before any relief was warranted:

“The mere possibility of recurrence is not enough,” a lawyer representing the agency said. “Survival rates for younger patients tend to be higher,” another wrote, citing a study presented in court.

Mind you, Educational Credit’s position was that Jorgenson should not get any sort of break.

This sort of case, where creditors continue to pursue borrowers who’ve discharged their debt in bankruptcy, is sadly familiar to bankruptcy attorneys when the borrower is fighting to keep their home. But what makes this case egregious that the debt had actually been repaid, yet Educational Credit kept trying to defy the court:

The case that caused the bankruptcy judges to accuse the agency of abuse concerned Barbara Hann, who took a particularly drawn-out beating from Educational Credit. In 2004, when Ms. Hann filed for bankruptcy, Educational Credit claimed that she owed over $50,000 in outstanding debt. In a hearing that Educational Credit did not attend, Ms. Hann provided ample evidence that she had, in fact, already repaid her student loans in full.

But when her bankruptcy case ended in 2010, Educational Credit began hounding Ms. Hann anew, and, on behalf of the government, garnished her Social Security — all to repay a loan that she had long since paid off.

When Ms. Hann took the issue to a New Hampshire court, the judge sanctioned Educational Credit, citing the lawyers’ “violation of the Bankruptcy Code’s discharge injunction.”

Educational Credit went on to appeal the sanctions twice, earning a reprimand from Judge Norman H. Stahl of the United States Court of Appeals for the First Circuit, who agreed with the bankruptcy judges that the agency “had abused the bankruptcy process.”

Asked for comment, Educational Credit responded that the case was not related to undue hardship and that it was based on “complicated issues of legal procedure.”

The “take no prisoners” approach of Educational Credit is an overreaction to the failure to make much of any debt collection efforts for student loans, resulting in the failure of the largest student loan guarantor in the early 1990s. Congress stepped in and gave student lenders what amounts to senior standing, allowing them eve to garnish Social Security payments. But Educational Credit has also helped to push the envelope:

One of the places where Educational Credit has had the biggest impact has been to shape the meaning of the phrase “undue hardship,” the standard required since the 1970s for relief from student debt. In 2009, for example, the agency persuaded the United States Court of Appeals for the Eighth Circuit to adopt stricter standards. One argument it made was that if student borrowers seeking bankruptcy could qualify for a repayment plan tied to their incomes they were, by definition, ineligible for relief.

The dissenting judge, Kermit E. Bye, said the decision “improperly limits the inherent discretion afforded to bankruptcy judges when evaluating requests” for relief. He also said the new standards subjected debtors to a higher burden of proof than was actually required by law.

Even if this sort of coverage leads to restrictions on debt collection as a sadistic extreme sport, it will provide relief only to the most distressed student debtors. Sadly, the laws on the books allow for plenty of leeching of student lenders without breaking them on the rack.