Now the Biden administration is facing pressure from Senate Democrats to change how they handle these requests. Her concerns follow a case that sparked public backlash after the department tried to fight the court-authorized pardon of a man with epilepsy, a case first reported by the Lever. The department dropped the appeal in February, but some senators say the case is an exception to standard practice.
Education, Department of Justice Reconsider stance on tackling bankrupt student loan borrowers
A scan of recent student loan-related bankruptcies seems to support their conclusion. Justice Department attorneys representing the Department of Education rejected several firing requests in March, including one involving a 77-year-old retired nurse who was struggling to pay off about $42,000 in student loans.
“While bipartisan efforts are underway in Congress to reform how student loans are treated in the bankruptcy code, administrative policy changes … are also necessary and long overdue,” said a group of 27 Senate Democrats led by Senator Richard J. Durbin (Ill . ), wrote Thursday in a letter to Education Secretary Miguel Cardona and Attorney General Merrick Garland.
The Department of Education acknowledged receipt of the letter and said the agency is committed to revising its approach to ensure borrowers are given a fair shot at bankruptcy relief.
Paying off educational debt through bankruptcy is difficult. People must file a separate lawsuit known as adversarial litigation, convince the court that the debt would constitute “unreasonable hardship” and stop the lender from thwarting their efforts.
The Department of Education, as a creditor of $1.6 trillion in government student loans, has the right to contest a bankruptcy filing to protect the loan program’s fiscal integrity. But congressional Democrats and advocacy groups say the federal agency doesn’t need to add another hurdle, given the hurdles borrowers must overcome in order for the court to approve their claim in the first place.
The Biden administration promised bankruptcy reforms. So why is it still fighting student loans in court?
In Thursday’s letter, lawmakers asked education and justice departments to set practical thresholds for bankruptcy relief. Agencies could refrain from challenging an application in cases of disability or poverty. The legislature also argues that a borrower’s participation in an income-related repayment plan should not preclude a claim for unreasonable hardship.
“All too often, the ED and DOJ refuse relief based on undue hardship…requiring debtors to actually demonstrate a certainty of hopelessness before they can receive relief,” the senators wrote. “Climbing this legally unnecessary bar is challenging enough for individuals represented by experienced attorneys. For those without representation, it is virtually impossible.”
Cardona has recognized the challenges borrowers face when looking for bankruptcy. In March he has tweeted that the department is “working to change our policies so that bankruptcy is an option for those struggling with student debt.”
“To ensure that every borrower can benefit from these changes, we asked [the Justice Department] request a stay of any active bankruptcy proceedings if the borrower so requests,” Cardona wrote.
Senate Democrats also questioned in their letter whether the Justice Department has issued guidance to its attorneys handling active bankruptcy cases, allowing borrowers to temporarily file their cases during the pandemic. They also asked for outreach information to ensure borrowers and their attorneys are aware of the option.
Department of Education shows limits of pandemic relief as it tackles bankrupt borrowers
Over the past decade, the Department of Education has considered revising its bankruptcy policy several times. In 2018, the department asked the public for feedback on whether updates were needed. The agency questioned whether borrowers were discouraged from seeking help because their standard was too prohibitive.
While the Department could better define what constitutes undue hardship, Congress ultimately has to do the hard work of changing how student loans are treated in bankruptcy cases.
Durbin, chairman of the Senate Judiciary Committee, and Sen. John Cornyn (R-Tex.) have sponsored a bill that would allow borrowers to bankrupt their federal student loans after 10 years, similar to old bankruptcy rules. Bipartisan legislative and administrative interest in bankruptcy amendments is reviving the movement after years of failed efforts to streamline the process.
President Biden, who as a senator helped push for tougher consumer bankruptcy laws, said on the campaign trail he now supports people who are going bankrupt paying their student debt — a position that supports the department’s efforts.