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Bankruptcy and Student Loans-Time to Reconsider Discharge

By Dana Wilkinson, Attorney at Law

Student loan debt is not dischargeable in bankruptcy. That’s not news–it’s pretty much common knowledge.  But student loan debt for newly-minted lawyers is a growing problem, since the job market for lawyers is, well, abysmal would be an optimistic assessment.

[A] generation of J.D.?s face the grimmest job market in decades. Since 2008, some 15,000 attorney and legal-staff jobs at large firms have vanished, according to a Northwestern Law study. Associates have been laid off, partners nudged out the door and recruitment programs have been scaled back or eliminated.And with corporations scrutinizing their legal expenses as never before, more entry-level legal work is now outsourced to contract temporary employees, both in the United States and in countries like India. It?s common to hear lawyers fret about the sort of tectonic shift that crushed the domestic steel industry decades ago.

You would think that lawyers would do a better job of taking care of their own.  After all, law schools make a big deal about their job placement services, and the number of graduates who have jobs.  But, since law schools are often profit centers for universities (or for-profit institutions), law schools are in the business of selling themselves, even if they have to fudge the numbers to do so.

The surveys themselves have a built-in bias. As many deans acknowledge, the results are skewed because graduates with high-paying jobs are more likely to respond than people earning $9 an hour at Radio Shack. (Those who don?t respond are basically invisible, aside from reducing the overall response rate of the survey.)

Certain definitions in the surveys seem open to abuse. A person is employed after nine months, for instance, if he or she is working on Feb. 15. This is the most competitive category ? it counts for about one-seventh of the U.S. News ranking ? and in the upper echelons, it?s not unusual to see claims of 99 percent and, in a handful of cases, 100 percent employment rates at nine months.

A number of law schools hire their own graduates, some in hourly temp jobs that, as it turns out, coincide with the magical date. Last year, for instance, Georgetown Law sent an e-mail to alums who were ?still seeking employment.? It announced three newly created jobs in admissions, paying $20 an hour. The jobs just happened to start on Feb. 1 and lasted six weeks.

Does this business model ring a bell with anyone?  Young borrowers seduced by promises of a life of ease and prestige borrow more than they can possibly repay.  And where do you go to find a 22-year-old skeptic, who can grasp the reality of a six-figure debt load?  Here’s the view from one such, Elie Mystal, eight years later:

I graduated from law school eight years ago, and I still don?t answer my phone unless I know who is calling. Every six to eight months, I call up the debt collection agencies that have been hounding me, and do a gut wrenching dance where I try to give them a little more money towards debts that I?ll need to hit the lottery to ever pay off, while they ask for dollar amounts I simply don?t have. At the end of the day, I?m judgment proof. There?s only so much blood you can get out of a rock.And ?credit,? I mean, I don?t even know what that is anymore. I?ve been running a straight cash lifestyle since 2003. No really, I haven?t had a credit card since ?03, even my debit card isn?t a credit card. If I had hit the Mega Millions last week, it?d still be seven year before I saw a 700 on my credit report. People say ?Elie, you know you?ll never be able to own a home or finance a car if your credit is that bad.? And I laugh. ?Own?? Are you kidding me? Getting a landlord to accept my application to rent is an effort of futility. I once got passed over on a rental for a guy who had just been released from prison.

Mystal asks a couple of  very good questions:  First, where is the consumer protection for these kids? “But, bottom-line, if you sell a toaster that explodes 50% of the time, the government won?t let you sell that toaster. Maybe the ABA doesn?t have the teeth to do it, but somebody needs to regulate law schools. How many lawyers need to be in the room before they start making up some laws?” And then there is this:

The biggest argument in favor of preventing student debt from being discharged through bankruptcy is that it makes banks willing to loan the money. Well, maybe they shouldn?t? Maybe you should have to get an educational loan the same way you get a loan for a small business. Maybe you should have to sit down with a banker and explain to them how you are going to pay them back before they give you money. 150 LSAT score and acceptance to a third tier law school with questionable employment statistics? Sorry kid, nobody is going to give you money for that, for your own good.

The basic public policy justification for bankruptcy is that it is not healthy for all of us for some of us to be enslaved by debt. There is an entire generation of law school grads for whom that is a reality, and it should be chilling for the rest of us.  And I am sure law school grads are not the only one affected–I just happen to be more familiar with the legal profession.  The time has come to reassess the reasons for non-dischargeability of student loan debt, before we completely waste an entire generation of smart young lawyers.  And other professionals as well.

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Full post as published by Bankruptcy Law Network on January 10, 2011 (boomark / email).