Educated Yet Broke

Can you be too poor to file for bankruptcy, yet have the ability to repay your student loans?

When Congress amended the Bankruptcy Code in 2005, it also amended the Judicial Code to provide for the waiver of the mandatory filing fee for bankruptcy. That’s right. Prior to this statutory amendment, if you were so financially strapped that you couldn’t pay the filing fee (then, $150 for Chapters 7 and 13; now, $220 for Chapter 7 and $150 for Chapter 13), you were out of luck: Per the Supreme Court’s 1973 decision in United States v. Kras, 409 U.S. 434, in forma pauperis relief was unavailable in bankruptcy. Lest we prematurely praise Congress for changing this state of affairs, debtors today will get a waiver of the filing fee only under very narrow circumstances. A debtor must have (1) household income less than 150% of the poverty line and (2) and an inability to pay the filing fee in installments (see 28 U.S.C. § 1930(f)(1)).

Now that we have a sense of what Congress deems to be a financially dire situation, at least for purposes of filing for bankruptcy, it strikes me that we might use this measure to gauge a debtor’s inability to repay other types of debts—say, for example, student loans. In an empirical study of the discharge of student loans in bankruptcy, Michelle Lacey (mathematics, Tulane) and I documented that the financial characteristics of the great majority of debtors in our sample evidenced an inability to repay their student loans. One measure we used was the amount of the debtor’s household income in relation to the poverty line established by the U.S. Department of Health and Human Services. We had sufficient information to calculate this figure for 262 discharge determinations. For this group of debtors, half of them had household income less than 200% of the poverty line. It didn’t occur to us to run the numbers using the 150% figure applicable to the fee waiver. In light of the new statutory provision, I’ve set out to look at our data from this perspective. The numbers are sobering, to say the least.


Approximately 35% of the 262 debtors had (1) household income less than 150% of the poverty line and (2) less than $201.93 (in 2003 dollars) in monthly disposable household income—that is, the equivalent of the $220 Chapter 7 filing fee in 2006. Based on these figures, slightly more than a third of the student loan debtors would have been on their way to qualifying for a waiver of the bankruptcy filing fee had they filed for Chapter 7 today. Within this subgroup, however, approximately 42% of the debtors were denied a discharge of their student loans—which, on average, would have taken 2 years and 9 months to repay if the debtor lived expense-free and devoted all household income to this endeavor. It seems horribly unrealistic to expect that such a debtor would have the ability to repay his or her student loan. While the Bankruptcy Code fails to define “undue hardship,” the standard for discharging student loans in bankruptcy, perhaps courts should begin to look at the new fee-waiver provision to inform their application of the standard and to avoid troubling results such as these.

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10 Responses

  1. Seth R. says:

    You’ve missed an even bigger expense.

    As a general matter, bankrutpcy attorney fees for filing your typical Chapter 7 have roughly doubled all over the place.

    Used to be in my neighborhood, that you could get representation on Chapter 7 for a flat fee of about $750. Somewhere around there.

    Just about every bankruptcy lawyer I know is charging about $1,500 now. Flat fee, up front. Because, of course, attorney’s fees are dischargeable in the bankruptcy. Anything your client owes you after discharge is “gone with the wind.”

    Then you have to factor in that the client has to pay about $50 for credit counseling, and $50 for debtor education (assuming a joint bankruptcy), and THEN the $299 court filing fee.

    You’re looking at about $1,900 in expenses for a typical Chapter 7 in my community. Unless you plan to go pro se and have your case dismissed on some deficiency. Or if you plan to pay some fly-by-night paralegal organization to fill out your application and then get your case dismissed on exactly the same deficiencies (only now you’ve shelled out an extra $300).

    The filing fee, the fees for classes… That stuff is all small potatoes compared to the forced increase in attorney’s fees. This is the real killer in BAPCPA.

  2. Dylan says:

    Approximately 35% of the 262 debtors had (1) household income less than 150% of the poverty line and (2) less than $201.93 (in 2003 dollars) in monthly disposable household income—that is, the equivalent of the $220 Chapter 7 filing fee in 2006. …

    Within this subgroup, however, approximately 42% of the debtors were denied a discharge of their student loans—which, on average, would have taken 2 years and 9 months to repay if the debtor lived expense-free and devoted all household income to this endeavor.

    I think you greatly underestimate the potential for gamesmanship and fraud in this area. The hordes of 24 year old graduates in NYC eeking along a marginal existence (usually with the assitance of off the books help from family) in the hope of a better tomorrow would love to take this route to a free education. Combine the hope for a prestigious arts/letters/fashion job someday with the certainty of discharge of your loans? Keeping your provable income under $14k for a bit isn’t that bad a price to pay.

  3. I think another factor missing from the analysis is the discharge of other debts. Sure, at the time of filing the debtor has almost no disposable income, but if all the other debts (other than student loans) are discharged, then ostensibly there will be more the debtor can pay.

    I’m interpreting disposable to mean all income after current expenses, including debt servicing. If a different definition is intended, then perhaps my comment becomes less relevant.

  4. Seth R. says:

    Michael,

    That’s fine, except that doesn’t really help in paying for attorney’s fees.

    Those MUST be paid before filing (unless the lawyer in question is a fool). Discharge of debts doesn’t help with the legal fees.

    It does however, possibly help with the filing fee, since you can apply to pay that in installments.

  5. Fair enough. I was only addressing the student loan point.

  6. Paul Gowder says:

    The bankruptcy bill screwing the poor? Gosh, who could’ve guessed?

  7. Cynthia A. Sweeney says:

    I had to beg, borrow and plead to come up with 1325 to pay attorney. I went to Legal Aid thinking that they could help me with this but all they told me was to hire a private attorney.

    I think I qualified for a waiver on the filing fee but was not told that by the bankruptcy attorney. I did get a waiver on the 50.00 credit counseling fee however but it took an act of congress tom even get that.

  8. Even if I was free from my other debts, I am not sure that it would take me 2 years and 9 months to repay all of it. My student loans are too much–it would take me much longer