Pressure is mounting on the Biden administration to ease student loan debt payments in bankruptcy.
President Joe Biden lobbied for reform of the bankruptcy system, which currently makes paying off student loan debt extremely difficult. borrowers must to fulfill a high burden of proof: the repayment of the loans would represent “unreasonable hardship”.
Last fall, Biden’s federal student aid chief, Richard Cordray, told Congress that the Department of Education had begun discussing reform of student loan bankruptcy rules. But the agency has more recently been actively speaking out against borrower relief in federal bankruptcy court.
Since the beginning of the year prosecutors appealed two separate bankruptcy decisions in which the judges sided with the borrowers and allowed their student loan debt to be paid off. The government quickly dropped the appeals, but not before drawing attention to what borrower advocates called a “stubborn commitment” to flawed policy.
“Retracting opposition to individual student debt relief due to media pressure is not a solution,” said Dan Zibel, vice president and chief counsel at the National Student Legal Defense Network, in a statement.
“The agency is basically playing hand-to-hand with the finances of the struggling families,” he added.
The National Student Legal Defense Network led a multi-stakeholder coalition last week, urging the Department of Education to immediately halt all efforts to defend or appeal debt relief for bankrupt students Court.
A spokesman for the Department of Education told CNN this week that the agency “is committed to overhauling its approach to bankruptcy to streamline the process and ensure borrowers are given a fair chance.”
“Meanwhile, ED and the Department of Justice are working to ensure that the government does not appeal bankruptcy cases where the borrower has demonstrated undue hardship,” the spokesman said in an emailed statement.
Student debt is treated differently by the bankruptcy court than other types of debt, making it difficult, but not impossible, to obtain relief.
A person must file a separate lawsuit specifically for their student debt as part of bankruptcy proceedings known as “adversary proceedings.” The borrower must prove that the repayment of the student loan will represent “unreasonable hardship” for him and his family.
Historically, most courts use what’s called the “Brunner test” to assess whether the borrower has shown undue hardship, according to the National Consumer Law Center. Evidence must be provided that he or she will not be able to maintain a minimum standard of living if forced to repay the student loans, that this financial situation will continue for most of the loan repayment period, and that a good faith effort has been made to pay.
“It’s not working well,” Cordray said at the House Committee hearing last year.
Under the current rules, those struggling with bankruptcy are “forced to go to court — if you can imagine such a thing — and tell them how miserable their lives are, to ask for some kind of bankruptcy discharge and they rare to get,” he said.
While it’s rare for a judge to agree to settle a student loan debt in bankruptcy, it has done so twice so far this year.
In mid-January, a Delaware bankruptcy judge approved approximately $95,000 in student loan redemption for Ryan Wolfson, a university founded in 2010 at Penn State University Graduate who initially filed for bankruptcy in 2019, according to court records.
Wolfson, 35, revealed he struggled to find a job that pays enough to cover his expenses, made even more difficult by his epilepsy. He worked as a delivery driver until 2019, when he suffered a seizure while driving and his car was totaled.
“Since graduating from college, this debtor could not afford modest housing, food, or easy transportation without the help of his father,” Chief Justice Laurie Selber Silverstein wrote in her decision.
“It’s not a lack of work ethic. His choice of jobs, even while working full-time, did not allow him to pay off his student loans. As there is no evidence that his situation will improve, Wolfson is entitled to a dismissal,” she added.
In another case, a judge approved forgiveness of more than $110,000 in student debt for Monique Denise Wheat, a 32-year-old single mother in Alabama, according to court documents. The judge also found that paying off the debt would constitute “unreasonable hardship” for Wheat.
Wheat earned a bachelor’s degree in criminal justice from Troy University and also went into debt to pursue a master’s degree in clinical counseling at Bellevue University, but did not complete her degree. Unable to find work related to her degree, she works as a patient technician at a medical center.
But the Education Ministry appealed both verdicts, first reported by the Daily Poster, an investigative journalism website, and then withdrew its appeal within days.
“ED does not support an appeal and believes the appeal was filed by the DOJ as a procedural matter. We have asked for the dismissal to be withdrawn,” wrote Under-Secretary of State for Education James Kvaal on twitter last week in relation to the Wheat case.
The department spokesman also noted that while the pandemic student loan payment pause remains in effect until May 1, any borrower in adversarial bankruptcy proceedings may request and receive a stay of their proceedings.
Legislation from Congress is needed to reform the bankruptcy law, but some advocates argue that the Department of Education can also stop opposing so many requests for student loan terminations in bankruptcy cases.
“The department may use its current administrative authority to end its practice of contesting student loan repayments in the event of bankruptcy of its borrowers,” according to a legal essay published in the Minnesota Law Review last year. It was authored by Pamela Foohey, a professor at the Cardozo School of Law, and Aaron Ament, president of Zibel and president of the National Student Legal Defense Network.
Draft law to reform the insolvency system has some bipartisan support. A bill that would make it easier to redeem student loans in insolvency was introduced last year by Sen. Dick Durbin, an Illinois Democrat, and Sen. John Cornyn, a Republican from Texas.
Biden endorsed a bankruptcy reform proposal by Massachusetts Sen. Elizabeth Warren during the 2020 campaign campaign to win over the party’s left-wing voters. The plan stipulated that student loan debt could be paid off like other debts in bankruptcy.