Will Discharging Student Loans In Bankruptcy Get Easier? Biden Administration Sends Mixed Messages


Student loan borrowers hoping to have an easier path to student loan discharge through bankruptcy have been receiving conflicting messages from the Biden administration about what, if any, reforms may be coming. Here’s a breakdown.

Student Loan Forgiveness Through Bankruptcy: The Current Legal Landscape

There is a misconception that it is impossible to discharge student loan debt through bankruptcy, and that the law simply does not allow it. That is not the case. But the bankruptcy code and long-established court precedent can make it quite difficult.

To wipe out student loans in bankruptcy, most student loan borrowers would have to prove that repayment of their loans would present an “undue hardship.” This makes student loan debt much different from other forms of consumer debt like credit cards and medical debts, which are much more easily discharged without a heightened standard.

The phrase “undue hardship” is not defined in the actual bankruptcy code, so it’s been left to judges to craft standards and tests to determine who meets that criteria. And those standards and tests generally present a high bar for student loan borrowers in terms of the burden of proof. In many jurisdictions, borrowers must prove that there is a “certainty of hopelessness” to their situation.

To even go about trying to prove undue hardship, borrowers must go through an “adversary proceeding,” which is effectively a lawsuit brought in bankruptcy court against the borrower’s student loan lenders. The borrower tries to show that they meet the undue hardship legal standard, while the student loan lender — which typically has enormous resources compared to the borrower — tries to prove otherwise, and ultimately a judge makes a ruling. For most federal student loans, the federal government is the lender and will oppose the borrower in an undue hardship proceeding.

Adversary proceedings to discharge student loans in bankruptcy can be taxing in every way for the borrower — emotionally, logistically, and financially. Nearly every aspect of the borrower’s life and finances will be examined, and the process can be grueling and time consuming. Hiring a private attorney can help, but that can get expensive. Because of this, many borrowers won’t even try to discharge their student debt through bankruptcy, and some bankruptcy attorneys do not even take on these types of matters.

Biden Administration Had Suggested That Student Loan Bankruptcy Reform Might Be Coming

U.S. Department of Education Federal Student Aid chief operating officer Richard Cordray told members of Congress at a hearing last year that the Department of Education’s current approach to federal student loan bankruptcy discharges is less than ideal for borrowers, and needs to change. “The process doesn’t work well,” he testified. “[The bankruptcy process] needs to be reformed … and we’re committed to doing that.”

Cordray suggested, without providing much in the way of specifics, that the Biden administration was exploring options for modifying how the Education Department approaches bankruptcy proceedings that involve federal student loan discharge requests. Bankruptcy reform advocates have suggested several possible options for the administration to consider, including simply not opposing borrowers in bankruptcy adversary proceedings if they meet certain criteria — for example, if the borrower can demonstrate a persistent state of poverty or ongoing reliance on public benefits as their primary or only means of support. While the Biden administration cannot change the bankruptcy code itself (that would require an act of Congress), exercising discretion and choosing not to engage in the adversary process could be a game-changer for many borrowers.

Inconsistent Signals From The Biden Administration On Student Loan Bankruptcy Reform

So far, the Biden administration has not implemented reforms to its student loan bankruptcy policies. And instead, it has seemingly continued to vigorously oppose borrowers who are seeking to discharge their federal student loans in bankruptcy.

Last month, a bankruptcy court in Delaware approved a borrower’s discharge request of approximately $100,000 in student loan debt, over the Department’s opposition. The judge based her ruling, in part, on the borrower’s long-running medical problems, which she found constituted an undue hardship. The case was Wolfson v. Department of Education.

But in a subsequent move that surprised student loan borrower advocates, the Department of Education appealed the Wolfson ruling. After widespread outcry, the Department then abruptly reversed its decision. “We’re working hard to deliver relief to student loan borrowers… We will withdraw the appeal in the Wolfson bankruptcy case [and] review how we handle future claims,” wrote Under Secretary of Education James Kvaal in a tweet last week.

After the Biden administration appealed yet another favorable student loan bankruptcy ruling, the Department reversed itself yet again. “The Department is committed to fixing student loan bankruptcy,” tweeted Under Secretary Kvaal yesterday. “In the case of Wheat v. Great Lakes Higher Education Corp., [the Department] does not support an appeal and understands that the notice of appeal was filed by [the Department of Justice] as a procedural matter. We have asked that the notice be withdrawn.”

Yesterday, a coalition of student loan borrower advocacy organizations sent a letter to Education Secretary Miguel Cardona, urging him to institute student loan bankruptcy reforms.

“Although we very much welcome the Department’s reversal in the Wolfson matter, the events in that case leave us deeply concerned that the Department is fighting other student loan borrowers seeking a fresh start through bankruptcy,” wrote the coalition. “Under your watch, the Department has a demonstrated record of successfully opposing discharge requests, leaving those borrowers simply without any recourse… The stubborn commitment to this flawed policy is contrary to the Department’s mission of protecting students from fraud and ensuring that higher education is a launching point, not a stumbling block, for students’ financial mobility.”

The coalition urged the administration to “immediately cease its practice of opposing borrowers seeking student loan relief in the bankruptcy process.” So far, the administration has not yet issued a broad response.

What’s Next?

Bankruptcy reform could originate in Congress, rather than the White House. Last year, a bipartisan group of senators unveiled the Fresh Start Through Bankruptcy Act, which would eliminate the undue hardship standard for federal student loan borrowers who have been in repayment on their loans for at least the previous 10 years. However, the bill has not yet advanced, and the 10-year waiting period would exclude many borrowers from relief.

Advocates argue that rather than waiting for Congress to act, the Biden administration has the power to put the breaks on opposing federal student loan bankruptcy discharge requests now. Whether that will ultimately happen remains to be seen.

Further Student Loan Reading

Student Loan Income Based Repayment Is Broken, Say Advocates. Here’s Their Plan For Biden To Fix It.

Untangling Student Loan Forgiveness: Who Qualifies For Three Complicated Programs For Public Service Workers

Biden May Be “Making A Decision Now” On Student Loan Cancellation, Says Key Senator

Navient Student Loan Settlement: Who Qualifies For Relief, And What To Do




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