Democrats push to ease ‘unnecessary high bar’ for debt relief in bankruptcy

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.

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.

A letter sent Thursday from 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) to Education Secretary Miguel Cardona and Attorney General Merrick Garland argued that the situation is made more difficult by how the government contests these debtors in court.

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

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.

“All too often,” the letter argued, “[The Department of Education] and [The Department of Justice] 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.

“Opposing bankrupt student borrowers is costly for the Department and only fuels their financial turmoil,” Student Defense President Aaron Ament 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

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.

Matthew Bruckner, a bankruptcy law professor at Howard University, stressed that the student debtors in similar situations rarely see that kind of success.

“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,” Bruckner previously told Yahoo Finance .

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 [email protected]. Follow her on Twitter @aarthiswami.

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Source: https://finance.yahoo.com/news/student-loans-debt-relief-in-bankruptcy-180016916.html