For Some Student Loan Borrowers, Bankruptcy Could Be Viable Option

This is the third story in a series on student loan debt. Read the first one here and the second here.

Walk around a college campus in Boston and it's easy to find someone worried about student loan debt.

Some 44 million Americans have outstanding education loans, and for many, the burden of making monthly payments can be crushing.

But for a small number of borrowers who truly can't afford to pay back their debt, there may be a solution they've overlooked: going to bankruptcy court.

"While it's very difficult, it's not impossible," said Betsy Mayotte, founder of a nonprofit called The Institute of Student Loan Advisors.

Bankruptcy can be a major black mark on your financial record. And for most people with student loans, declaring bankruptcy won't help. Unlike other kinds of consumer debt, like a credit card bill, education loans can't normally be discharged.

The exception is if a borrower can show that paying back an education loan would pose an "undue hardship," a standard laid out in the federal bankruptcy code.

If you're in those circumstances, having a good lawyer can help. But those who are most likely to need legal help are often the least able to afford it.

A broad coalition of organizations in Massachusetts recently partnered to help borrowers seek assistance in bankruptcy court, including the Massachusetts Bar Association, the state Attorney General's Office and the Greater Boston Chamber of Commerce's Student Debt Working Group.

Through a new initiative called the Student Loan Borrower Assistance Project, the groups are partnering with local attorneys to represent low-income borrowers who are struggling to pay back their education loans.

"We're helping people who can't help themselves," said Frank Morrissey, an experienced bankruptcy lawyer who helped launch the project.

Morrissey said bankruptcy is only appropriate for a small number of borrowers who meet the "undue hardship" standard. Federal bankruptcy laws don't define exactly what the term means, but courts across the country often look for debtors to prove they've made good faith efforts to repay their loan; that their financial picture isn't likely to improve; and that they can't maintain a minimal standard of living for themselves and any dependents while continuing to make loan payments.

Conditions such as having a physical or psychological disability, or caring for a sick child as a single mother could potentially qualify.

"Essentially you can't work," Morrissey explained. "And you're not going to be able to work going forward. That's the test."

The Massachusetts Bar Association is working to get the word out about its program, which provides free legal representation for borrowers. Without legal training, experts say, many borrowers struggle to adequately represent themselves in bankruptcy court, where it's important to know the rules and prepare the right evidence to persuade a judge.

And lenders will be represented by a team of skilled, corporate lawyers, Morrissey said.

"It's not a fair fight if only one side has a lawyer," he said.

Bankruptcy cases involving education loans could become more common in the future as more parents, grandparents and families take on debt to help send kids to school.

Mayotte, the student loan expert, said half of all borrowers are over the age of 30, and a quarter are over 45.

Older borrowers are now the fastest growing population of debtors with student loans, according to information published by the Consumer Financial Protection Bureau. And as that group grows, the pool of people who might be eligible for bankruptcy will grow, too.