President Joe Biden campaigned to reform the bankruptcy system, which currently makes it extremely difficult to pay off student loan debt. Borrowers must meet a high burden of proof: that repaying the loans would cause “undue hardship.”
Since the beginning of the year, government lawyers appealed two separate bankruptcy decisions in which judges sided with the borrowers, allowing their student loan debt to be discharged. The government quickly dropped the appeals, but not before drawing attention to what advocates for the borrowers called a “stubborn commitment” to flawed policy.
“Withdrawing opposition to individual student debt discharges based on media pressure is not a solution,” said Dan Zibel, vice president and senior counsel. in the National Student Legal Defense Network, in a statement.
“The agency is essentially playing the mole with the finances of struggling families,” he added.
A Department of Education spokesperson told CNN this week that the agency is “committed to reviewing its approach to bankruptcy to streamline the process and ensure borrowers get a fair shot.”
“Meanwhile, ED and the Justice Department are working to ensure the government does not appeal bankruptcy cases in which the borrower has demonstrated undue hardship,” the spokesperson said in an emailed statement.
Student debt is rarely discharged in bankruptcy
Student debt is treated differently in bankruptcy court than other types of debt, making it difficult, but not impossible, to be granted a discharge.
A person must file a separate lawsuit specifically for their student debt in bankruptcy proceedings, known as the “adversarial proceeding.” The borrower must show that repaying the student loans will impose an “undue hardship” on him or her and their dependents.
Historically, most courts use what’s known as the “Brunner test” to assess whether the borrower has shown undue hardship, according to the National Consumer Law Center. It requires showing that he or she is unable to maintain a minimum standard of living if forced to repay student loans, that this financial condition will continue for most of the loan repayment period, and that a good faith effort has been made to to pay.
“It doesn’t work right,” Cordray said in the House committee hearing last year.
Under the current rules, those fighting bankruptcy “are forced to go to court, if you can imagine such a thing, and tell how miserable their lives are to beg for some kind of bankruptcy relief and rarely get it.” . he said.
Two Borrowers Recently Received Relief
While it’s rare for a judge to agree to discharge student loan debt in bankruptcy, it’s happened twice so far this year.
Wolfson, 35, showed that he has had difficulty finding a job that pays enough to cover his expenses, made more difficult by his epilepsy. He worked as a delivery man until 2019 when he had a seizure while driving and wrecked his car.
“Since graduating from college, this debtor was unable to afford a modest apartment, food to eat, or basic transportation without the help of his father,” Senior Judge Laurie Selber Silverstein wrote in her decision.
“It’s not because of a lack of work ethic. His variety of jobs, even when he was working full time, didn’t allow him to pay off his student loans. As there is no evidence to suggest that his situation will improve, Wolfson is entitled to a discharge.” she added.
In a separate case, a judge approved the discharge of more than $110,000 of student debt for Monique Denise Wheat, a 32-year-old single mother in Alabama, according to court documents. Similarly, the judge determined that paying the debt would create an “undue hardship” for Wheat.
Wheat earned a bachelor’s degree in criminal justice from Troy University and also went into debt to earn a master’s degree in clinical counseling from Bellevue University, but did not complete his degree. She has not found a job related to her career and works as a patient technician in a medical center.
Congressional legislation is needed to reform the bankruptcy code, but some lawyers argue that the Department of Education can also stop opposing so many requests to discharge student loans in bankruptcy proceedings.
“The Department may use its current administrative authority to stop its practice of challenging the discharge of student loans in its borrowers’ bankruptcy cases,” according to a legal essay published last year in the Minnesota Law Review. It was written by Professor Pamela Foohey of Cardozo Law School, as well as Zibel and National Student Legal Advocacy Network President Aaron Ament.