John Nacion/NurPhoto via AP
The provisions of the current bankruptcy law make it nearly impossible to discharge student loan debt even while filing bankruptcy.
One month before then–presidential candidate Joe Biden secured the endorsement of his former rival Elizabeth Warren, he embraced her bankruptcy plan for student loan relief. “I’ve endorsed Elizabeth Warren’s bankruptcy proposal, which … allows for student debt to be relieved in bankruptcy and provides for a whole range of other issues,” Biden said at the time.
It marked an almost stunning reversal. The strictest provisions of the current bankruptcy law, which make it nearly impossible to discharge student loan debt even while filing bankruptcy, were championed by Biden personally in 2005 when he was a senator. He sparred in a legislative hearing about the proposal at the time with Warren, when she was still a Harvard law professor. Biden’s shift on bankruptcy and student debt was perhaps the very strongest evidence that he was running to be a different politician as president than the profile he cut in the Senate.
The bill created an especially onerous process for shedding student debt. After a debtor goes through the general filing process, they’re required to submit a second action, called an adversary proceeding, usually against the Education Department, which backs the vast majority of student loans in the United States. The person filing for bankruptcy must then prove “undue hardship” incurred by those debt payments to get the loans relieved. The Education Department then (almost always) opposes the filing, and the debtor is forced to prove it in court. This, in essence, is what candidate Biden pledged to change.
But over a year into the Biden administration, it has not changed. While the expectation remains that there will indeed be an overhaul, the Education Department still awaits guidance on its new protocol. In the meantime, it has continued apace with its discretionary practice of contesting undue hardship claims, forcing debtors to battle for student loan relief in court and fighting them every step of the way.
On March 8, the department is scheduled to haul Heather Smart into court to contest her claim that she cannot pay the $95,180 she owes in student loans from her time attending New Mexico Junior College and East New Mexico University, as part of her bankruptcy filing.
Smart is filing for bankruptcy because of a debilitating cancer diagnosis. According to official documents, she is “currently unemployed due to being in the process of receiving extensive medical care and treatment for myriad issues relating to several forms of aggressive and invasive cancer, as well as a blood disorder.” She’s expected to begin the first in a series of invasive surgeries just days after her court date opposite the Education Department, at which point she “will be unable to maintain successful or meaningful employment for the foreseeable future and may potentially be permanently disabled as a result of treatment.” Right now, she owes approximately $1,017 per month in federal student loan debt; her unemployment sums to $1,888 a month.
The official position of the Education Department is that Smart’s condition is not sufficiently hopeless. “When her health improves, she has college degrees and is capable of maintaining full-time employment and can maintain an appropriate standard of living while repaying her loans,” the department held in its response brief. “To that end, she has been able to maintain good jobs in the past and can do so in the future … She has the burden of proof that she meets all three criteria of the Brunner test.”
Overhauling the standard is relatively simple, even without legislation—the Education Department could simply not contest the assertion of undue hardship.
The so-called Brunner test, named for a student debtor named Marie Brunner who attempted to use undue hardship in 1987, has become the near-impossible standard that one has to meet to get student loans forgiven. It has emerged in part because the aforementioned bankruptcy bill never defined “undue hardship.” Under the Brunner test, the three counts that have to be proven are an inability to pay loans and maintain a minimal standard of living, the unlikelihood of financial circumstances improving in the future, and proof of a good-faith effort to pay back the debt.
In other words, the Education Department feels that Smart, who may be permanently disabled as a result of her cancer treatment, if she survives it, hasn’t proven herself to be convincingly and lastingly hard up.
Everyone knows that this system is not working, and still it plods along. Last October, Federal Student Aid COO and former Consumer Financial Protection Bureau director Rich Cordray testified before Congress that the agency would work with the Department of Justice to revise how it approaches undue hardship cases. “The process doesn’t work well. It needs to be reformed … and we’re committed to doing that,” said Cordray. “There have been discussions already with the Justice Department. They, too, are willing to have us revise our approach.”
Overhauling that standard is relatively simple, even without legislation—the Education Department could simply not contest the assertion of undue hardship, and allow student loan debt to be processed much in the same way that all other debt is processed in bankruptcy hearings. But it has refused to do that.
The Smart case is not even the most flagrant example of the Education Department going to exceptional lengths to impede borrowers from shedding debt in bankruptcy. On two separate occasions this winter, the department not only objected to an undue hardship claim, but appealed the ruling after a bankruptcy judge came down in favor of the debtor and discharged their student loans.
In January, a bankruptcy judge in Delaware granted a discharge of approximately $100,000 to Ryan Wolfson, owing to his debilitating epilepsy. A few days later, the department filed an appeal to prevent him from receiving that relief. Not long after, a judge in Alabama granted Monique Wheat, a single mom, a discharge of approximately $111,000. In early February, the department appealed again. In both cases, the department withdrew its appeals after public outcry, as was reported by the Daily Poster.
Despite widespread agreement that the undue hardship standard can and will be revamped, the various officials involved have dragged their feet on issuing formal guidance, which means more and more borrowers are dragged into legal proceedings and denied relief unnecessarily, by an administration that doesn’t even believe in the process it’s abiding by.
There’s even bipartisan support for fixing this. Sen. Dick Durbin (D-IL) held a Senate Judiciary Committee hearing to examine ways to lower the barrier to discharging student loans in bankruptcy, introducing legislation with support of Sen. John Cornyn (R-TX), and eventually co-sponsored by Josh Hawley (R-MO). (Interestingly, Sen. Warren is not a co-sponsor of the bill.)
The Biden administration has dragged its feet on student loan commitments of all types. It waited until the very last second to provision for the protection of student loan borrowers who were eligible to escape default. The Education Department claims to still be waiting on a memo regarding its executive authority to forgive $10,000 in student loan debt per person (that claim is troubled by Biden’s disavowal of his campaign pledge to do so). Biden had to be browbeaten last year into extending the student loan payment pause, and it expires again on May 1.
Changing the undue hardship standard is perhaps the easiest fix of them all. Yet, for Heather Smart, and others, those delays have come at an immense personal cost.
