Student loans: Democrats push to ease 'unnecessary high bar' for debt relief in bankruptcy – Yahoo Finance

As prominent Democrats call on the president to extend the payment pause and cancel student loan debt, a group of lawmakers sent a separate request to two agencies for an update on how the federal government is working to make debt relief more accessible for bankrupt student debtors.

More than 45 million Americans hold over $1.7 trillion in student debt. But unlike other forms of debt, federal student loans are not easily erased when a debtor undergoes bankruptcy proceedings. Debtors need to prove that they would suffer from “undue hardship” due to the loans, a standard that’s been very difficult to meet.

The situation is further worsened by how the government contests these debtors in court, lawmakers — led by Senate Majority Whip Dick Durbin (D-IL), chair of the Senate Judiciary Committee, Senate Majority Leader Chuck Schumer (D-NY), and Senator Patty Murray (D-WA) — stressed in a letter to Education Secretary Miguel Cardona and Attorney General Merrick Garland on Thursday.

Generally, in personal bankruptcy cases involving student debt, a judge applies the Brunner test — a three-pronged test applied to student loan borrowers who file adversary proceedings to discharge educational debt — to determine if specific student loans caused a borrower to suffer undue hardship.

“The federal government’s aggressive litigation challenges against students who pursue undue hardship claims further exacerbates this situation,” they stated.

“All too often,” the letter continued, “[Department of Education] ED and [Department of Justice] DOJ oppose undue hardship discharges in adversarial bankruptcy proceedings, requiring debtors to effectively demonstrate a certainty of hopelessness before they can obtain relief. Clearing this statutorily unnecessary high bar is challenging enough for individuals who are represented by experienced attorneys. It is virtually impossible for those without representation.”

Consumer advocates praised the move to push the two agencies to act. Aaron Ament, president of Student Defense, argued that student borrowers legally declared bankrupt “shouldn’t be automatically met with government opposition to discharging their student loans.”

“Opposing bankrupt student borrowers is costly for the Department and only fuels their financial turmoil,” he said in a statement. “It’s the opposite of the role the Department should be playing. We appreciate the Senate support towards this critical issue and we again call on the Department of Education to quickly reform its bankruptcy policies to better support student borrowers.”

Sen. Dick Durbin presides during the third day of Supreme Court confirmation hearings for Judge Ketanji Brown Jackson March 23, 2022. REUTERS/Kevin Lamarque

Debtors ‘through the wringer’

Sen. Elizabeth Warren (D-MA), a leading proponent of student loan cancellation, previously told Yahoo Finance that the U.S. bankruptcy system is “fundamentally wrong” on student debt discharges.

In the past, student debtors have managed to act as their own attorneys and negotiate write-downs of their loans, as Yahoo Finance has previously reported. One California woman with more than $350,000 in student debt saw 98% of her loans discharged in October 2021.

That’s not always the case, however, a point that Matthew Bruckner, a bankruptcy law professor at Howard University, stressed.

“The Department of Education should define undue hardship in a way that is much more debtor-friendly so that we don’t ask people to put themselves through the wringer like this, and the department stops objecting to discharge of obviously un-repayable debt,” he told Yahoo Finance previously.

One bipartisan bill may be able to address it — called the “FRESH START Through Bankruptcy Act of 2021,” the legislation is aimed at better enabling borrowers to seek a student loan discharge in bankruptcy by allowing federal loans to become eligible for discharge in bankruptcy proceedings 10 years after the borrower’s first loan payment comes due. (Borrowers with loans less than 10 years old would have to go through the current process.)

Aarthi is a reporter for Yahoo Finance. She can be reached at Follow her on Twitter @aarthiswami.

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