Pressure grows on Biden administration to change student loan bankruptcy rules

By Katie Lobosco, CNN

Pressure is growing on the Biden administration to make it easier to discharge student loan debt in bankruptcy.

President Joe Biden campaigned on reforming the bankruptcy system, which currently makes it extremely difficult for student loan debt to be discharged. Borrowers must meet a high burden of proof: that paying the loans off would cause “undue hardship.”

Last fall, Biden’s federal student aid chief, Richard Cordray, told Congress that the Department of Education had started discussing reforming student loan bankruptcy rules. But the agency more recently has actively fought borrower relief in federal bankruptcy court.

Since the start of the year, government lawyers appealed two separate bankruptcy decisions in which judges sided with borrowers, allowing their student loan debt to be discharged. The government quickly dropped the appeals, but not before drawing attention to what borrower advocates called a “stubborn commitment” to a flawed policy.

“Withdrawing opposition to individual student debt discharges based on media pressure isn’t a solution,” said Dan Zibel, vice president and chief counsel at the National Student Legal Defense Network, in a statement.

“The agency is essentially playing whack-a-mole with struggling families’ finances,” he added.

The National Student Legal Defense Network led a coalition of several advocacy groups last week in calling on the Department of Education to immediately pause all efforts to oppose or appeal student debt discharges in bankruptcy court.

A Department of Education spokesperson told CNN this week that the agency is “committed to revising its approach to bankruptcy to streamline the process and ensure that borrowers get a fair shot.”

“In the meantime, ED and the Justice Department are working to ensure that the government does not appeal bankruptcy cases where the borrower has proven an 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 kinds of debts, making it difficult, but not impossible, to be granted a discharge.

An individual must bring a separate lawsuit specific to his or her student debt within the bankruptcy proceeding, known as an “adversary proceeding.” The borrower must prove that paying off the student loans will impose an “undue hardship” for him or her and any dependents.

Historically, most courts use what’s known as the “Brunner test” to evaluate whether the borrower has shown an undue hardship, according to the National Consumer Law Center. It requires showing that he or she cannot maintain a minimal standard of living if forced to repay the student loans, that this financial situation will continue for the majority of the loan repayment period and that a good faith effort has been made to pay.

“It doesn’t work well,” Cordray said at the House committee hearing last year.

Under the current rules, those struggling with bankruptcy “are forced to go into court — if you can imagine such a thing — and recount how miserable their lives are in order to beg for some kind of bankruptcy relief and rarely get it,” he said.

Two borrowers recently granted relief

While it’s rare that a judge agrees to discharge student loan debt in bankruptcy, it happened twice so far this year.

In mid-January, a bankruptcy judge in Delaware approved the discharge of about $95,000 in student loans for Ryan Wolfson, a 2010 Penn State University graduate who initially filed for bankruptcy in 2019, according to court documents.

Wolfson, 35, showed that he has had difficulty finding a job that pays enough to cover his expenses, made harder by his epilepsy. He was working as a delivery driver until 2019 when he suffered a seizure while driving and totaled his car.

“Since graduating from college, this debtor could not afford a modest apartment, food to eat or basic transportation without the assistance of his father,” wrote Chief Judge Laurie Selber Silverstein in her decision.

“It is not for want of a work ethic. His assortment of jobs, even while working full time, did not permit repayment of his student loans. As there is no evidence to suggest that his plight will improve, Wolfson is entitled to a discharge,” she added.

In a separate case, a judge approved the discharge 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 similarly found that paying off the debt would create an “undue hardship” for Wheat.

Wheat earned a bachelor’s degree in criminal justice from Troy University and also incurred debt pursuing a master’s degree in clinical counseling at Bellevue University, but did not complete her degree. She hasn’t found work related to her degree and works as a patient tech at a medical center.

But the Department of Education appealed both of those rulings, as first reported by the Daily Poster, an investigative journalism website, and then withdrew its opposition within days.

“ED does not support an appeal and understands that the notice of appeal was filed by DOJ as a procedural matter. We have asked that the notice be withdrawn,” wrote Department of Education Under Secretary James Kvaal on Twitter last week in reference to Wheat’s case.

The department’s spokesperson also noted that while the pandemic student loan payment pause remains in effect until May 1, any borrower in an adversary bankruptcy proceeding can request and receive a stay on their proceedings.

Proposed reforms

Legislation from Congress 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 can use its current administrative authority to halt its practice of contesting 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 Cardozo School of Law Professor Pamela Foohey, as well as Zibel and National Student Legal Defense Network’s president Aaron Ament.

Proposed legislation to reform the bankruptcy system has some bipartisan support. A bill that would make it easier to discharge student loans in bankruptcy was introduced last year by Sen. Dick Durbin, a Democrat from Illinois, and Sen. John Cornyn, a Republican from Texas.

Biden endorsed a bankruptcy reform proposal from Massachusetts Sen. Elizabeth Warren on the 2020 campaign trail, in an effort to attract the party’s left-wing voters. The plan called for allowing student loan debt to be discharged in bankruptcy just like other debts.

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