President Joe Biden has campaigned to reform the bankruptcy system, which currently makes it extremely difficult to discharge student loan debt. Borrowers must meet a heavy burden of proof: that repayment of the loans would cause “undue hardship”.
Since the start of the year, government lawyers appealed two separate bankruptcy rulings in which judges sided with the borrowers, allowing their student loan debt to be forgiven. The government quickly dropped the calls, but not before drawing attention to what advocates for the borrowers called a “stubborn commitment” to flawed policy.
“Withdrawing opposition to individual student debt forgiveness due to media pressure is not a solution,” said Dan Zibel, vice president and chief counsel. to the National Student Legal Defense Network, in a statement.
“The agency is essentially playing mole-play 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 chance.”
“In the meantime, ED and the Department of Justice are working to ensure that the government does not appeal bankruptcy cases where the borrower has proven undue hardship,” the spokesperson said in a mailed statement. electronic.
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 obtain a discharge.
An individual must file a separate lawsuit specific to their student debt as part of the bankruptcy proceeding, known as the “adversarial proceeding.” The borrower must demonstrate that repayment of student loans will impose “undue hardship” on him and his dependents.
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. It must be demonstrated that he cannot maintain a minimum standard of living if he is forced to repay student loans, that this financial situation will continue for most of the loan repayment period, and that a good effort faith was made to pay.
“It doesn’t work well,” Cordray told 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 talk about how miserable their life is in order to seek some kind of bankruptcy relief and to rarely get it,” he said.
Two borrowers recently granted relief
While it’s rare for a judge to agree to discharge student loan debt in bankruptcy, it has happened twice so far this year.
Wolfson, 35, showed he struggled to find a job that paid enough to cover his expenses, made more difficult by his epilepsy. He worked as a delivery driver until 2019 when he suffered a seizure while driving and destroyed his car.
“Since graduating from college, this debtor could not afford a modest apartment, food to eat, or basic transportation without the help of his father,” Chief Justice Laurie Selber Silverstein wrote. in his decision.
“It’s not for lack of work ethic. His assortment of jobs, even if he worked full time, did not allow him to repay his student loans. As there is no evidence that his lot will improve, Wolfson is entitled to a discharge,” she added.
In a separate case, a judge has approved the release of more than $110,000 in student debt for Monique Denise Wheat, a 32-year-old single mother in Alabama, court documents show. The judge also found that paying off the debt would create “undue hardship” for Wheat.
Wheat earned a bachelor’s degree in criminal justice from the University of Troy and also went into debt to earn a master’s degree in clinical counseling from the University of Bellevue, but did not graduate. She hasn’t found work related to her degree and works as a patient technician at a medical center.
Legislation from Congress is needed to reform the bankruptcy code, but some lawyers say the Department of Education can also stop opposing so many requests to cancel student loans in bankruptcy proceedings. bankruptcy.
“The Department can use its current administrative authority to end its practice of contesting student loan discharge in its borrowers’ bankruptcy cases,” according to a legal essay published last year in the Minnesota Law Review. It was written by Cardozo School of Law professor Pamela Foohey and Aaron Ament, president of the National Student Legal Defense Network.