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We're Number One! We in Arizona are not Number Two! We're Number One! And Yes, That Means More Bankruptcy Cases.

By Joseph McDaniel, Esq.

Arizona is Number One again!

When I went to Emerson Elementary School on 7th Street and Palm Lane in Phoenix, we were taught that Arizona was tops for copper, cattle, and citrus. And that was good.

As a good friend of mine, Robin Dugas, has pointed out to me, Arizona is now tops in another area.

Arizona is now Number One in student loan defaults.

I'll be writing in the near future about possible changes in the statutes concerning student loans and discharges in bankruptcy, but for right now, the Rule of Two still applies. You count the potential debtor's arms and legs and head, and if the total is two or less, they might be able to get out from under a student loan in Bankruptcy Court.

Now, it's not quite that bad, but it's pretty darn bad; the standard for "hardship" in the caselaw is absurdly high, and that's a bad thing.

The reason it's a bad thing is that a student loan is a double-trouble kind of hit.

On the one hand, if a student just out of school can't get a job (okay, that's far-fetched, but it could happen, right?) and has a hundred grand in student loans, that student may go into default, and get garnished for the rest of eternity through no particular fault of his own.

If the student decides to get a real job; staying an economic pet of parents or a girlfriend or boyfriend is another alternative that crops up from time to time, and that is bad for the economy because the now-degreed student should have an opportunity to become a productive member of society.

Instead, they're cast into the economic outer darkness with a debt they can't dump under almost any circumstances, and that's a bad thing.

Another alternative is that the student-loan debtor gets a job, but at much less salary than expected, and can't make payments on that student loan, and goes into default, and now penalty interest and legal fees and garnishments start, and the student doesn't get a chance to generate a decent credit history, Until the World Shall End.

That's also a bad result.

Congress is looking at changing some of the rules concerning the discharge of private student loans, but for most students, that will provide no relief.

I yearn for the Good Old Days (formerly known as these trying times) when we could discharge student loans in ordinary bankruptcy cases.

But I'll keep you posted.

p.s. in some cases, a bankruptcy is the only way a student loan will ever get paid off; the debtor takes a huge pay cut, and can only pay some of her debts. So who you gonna pay? Well, probably not your credit card debts, if you have student loans.

In those cases, a bankruptcy filed in the District of Arizona may have some benefit for the debtor, because the non-student loan gets scraped off, and that frees up enough dough so that even on a lower salary, the student can stay current on the student loan.

And God help the poor student who goes into default, because nobody else will.

And that's a very bad thing.

Full post as published by Arizona Bankruptcy Attorney Blog on September 21, 2010 (boomark / email).