Student borrowers hoping for an easier path to student loan discharge through bankruptcy have received mixed messages from the Biden administration about possible reforms ahead. Here is a breakdown.
Student Loan Forgiveness Through Bankruptcy: The Current Legal Landscape
There is a misconception that paying off student debt through bankruptcy is impossible and the law simply does not allow it. This is not the case. But the bankruptcy code and long-established case law can make it quite difficult.
To eliminate student loans in bankruptcy cost, most student borrowers would have to prove that repayment of their loans would present an “undue hardship.” This makes student loan debt very different from other forms of consumer debt like credit card and medical debt, which are much more easily discharged without an increased standard.
The term âundue hardshipâ is not defined in the current bankruptcy code, so it has been left to judges to develop standards and tests to determine who meets these criteria. And these standards and tests generally set a high bar for student borrowers in terms of the burden of proof. In many jurisdictions, borrowers must prove that there is “certainty of desperation” in their situation.
To go even trying to prove undue hardship, borrowers must go through an âadversarial proceeding,â which is effectively a lawsuit filed in bankruptcy court against the borrower’s student lenders. The borrower tries to show they meet the legal standard of undue hardship, while the student lender â who usually has enormous resources over the borrower â tries to prove otherwise, and eventually a judge makes a ruling. . For most federal student loans, the federal government is the lender and will oppose the borrower through an undue hardship proceeding.
The adversarial procedures for canceling student loans in bankruptcy can be taxing on the borrower in every way â emotionally, logistically, and financially. Almost every aspect of the borrower’s life and finances will be reviewed, and the process can be exhausting and time-consuming. Hiring a private lawyer can help, but it can be expensive. For this reason, many borrowers won’t even attempt to pay off their student debt through bankruptcy, and some bankruptcy attorneys don’t even deal with these types of issues.
The Biden administration had suggested student loan bankruptcy reform might be coming
Richard Cordray, Chief Operating Officer of Federal Student Aid, U.S. Department of Education Recount members of Congress at a hearing last year that the Department of Education’s current approach to federal student loan discharge is less than ideal for borrowers and needs to change. âThe process is not working well,â he testified. “[The bankruptcy process] must be reformedâ¦ and we are committed to doing so.
Cordray suggested, without providing many details, that the Biden administration was exploring options to change how the Department of Education approaches bankruptcy proceedings that involve federal student loan release requests. Proponents of bankruptcy reform have suggested several possible options for the administration, including not opposing borrowers in adversarial bankruptcy proceedings if they meet certain criteria – for example, if the borrower can show persistent poverty or continued dependence on public benefits as their main or only means of subsistence. While the Biden administration cannot change the bankruptcy code itself (that would require an act of Congress), exercising discretion and choosing not to engage in the adversarial process could be a game-changer for many. borrowers.
Inconsistent signals from Biden administration on student loan bankruptcy reform
So far, the Biden administration has not implemented reforms to its student loan bankruptcy policies. And instead, he apparently continued to vigorously oppose borrowers seeking to discharge their federal student loans in the event of bankruptcy.
Last month, a Delaware bankruptcy court approved a request for release from a borrower of approximately $100,000 in student debt, despite opposition from the Ministry. The judge based her decision, in part, on the borrower’s long-standing medical issues, which she said constituted undue hardship. The case was Wolfson v. Ministry of Education.
But in a later decision that surprised student loan advocates, the Department of Education appealed the Wolfson decision. After a general outcry, the Department then abruptly reversed its decision. “We are working hard to provide relief to student borrowers… We will withdraw the appeal within the Wolfson bankruptcy case [and] review how we deal with future claims,â Education Undersecretary James Kvaal wrote in a Tweeter Last week.
After the Biden administration appeals another favorable student loan bankruptcy decision, the Department once again reversed. “The Department is committed to repairing the student loan failure”, tweeted Undersecretary Kvaal yesterday. “In the case of Wheat vs. Great Lakes Higher Education Corp., [the Department] does not support an appeal and understands that the Notice of Appeal was filed by [the Department of Justice] as a matter of procedure. We have requested that the notice be removed.
Yesterday a coalition of student loan advocacy organizations sent a letter to Education Secretary Miguel Cardona, urging him to institute student loan bankruptcy reforms.
“Although we are very pleased with the ministry’s turnaround in the Wolfson Regardless, the events of this case leave us deeply concerned that the Department is battling other student borrowers seeking a fresh start through bankruptcy,â the coalition wrote. “Under your watch, the Department has a proven track record of successfully resisting discharge requests, leaving these borrowers simply without any recourse…The stubborn commitment to this flawed policy is contrary to the Department’s mission to protect against fraud and to ensure that higher education is a starting point, and not a stumbling block, for the financial mobility of students.
The coalition urged the administration to “immediately cease its practice of standing in the way of borrowers seeking student loan relief through the bankruptcy process.” So far, the administration has yet to issue a comprehensive response.
Bankruptcy reform could come from Congress rather than the White House. Last year, a bipartisan group of senators unveiled the Fresh Start Through Bankruptcy Act, which would eliminate the undue hardship standard for federal borrowers who have been repaying their loans for at least 10 years. However, the bill has not yet moved forward, and the 10-year waiting period would exclude many borrowers from relief.
Supporters argue that instead of waiting for Congress to act, the Biden administration has the power to suspend applications for the release of federal student loans now. Whether that will eventually happen remains to be seen.
Further Reading on Student Loans
Income-based repayment of student loans is broken, lawyers say. Here is their plan for Biden to fix it.
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