Media Claims of Discharges for “most” Student Loan Cases in Bankruptcy are Grossly Misleading, Maligning.
The Departments of Education and Justice are using mainstream media to peddle a misleading narrative that is giving false hope to millions. Very few borrowers are seeing any relief.
Last week, the Departments of Education and Justice announced that a year-old revision to the bankruptcy process for student loans had proven to be successful. Dozens of mainstream media outlets subsequently published headlines claiming that “most”, or “virtually all” cases had resulted in discharges for the borrowers. Upon closer inspection of this announcement, however, it is obvious that this claim is grossly misleading if not blatantly false.
Interestingly, this false narrative is being disseminated broadly by the mainstream and financial media, with headlines that are almost universally worded in such a way as to evoke a negative perception of student loan borrowers.
BACKGROUND:
Unlike all other loans, student loans are uniquely non-dischargeable in bankruptcy because an additional burden of proof, where the borrowers must prove “undue hardship”, where they tried to pay, cannot pay, and will never be able to pay. This has rendered bankruptcy essentially impossible for the vast majority of borrowers, to where the number of discharges in a typical year are in the single digits
On November 17th, 2022, the Departments of Justice and Education unveiled their long-awaited plan to stop opposing student loan borrowers in bankruptcy court.
The new process, however, didn’t eliminate undue hardship. It kept undue hardship completely intact. The only difference was that the borrowers would plead their case to unelected, unappointed bureaucrats (or more likely, contractors) for the Department of Education rather than a bankruptcy judge.
While The Departments of Education and Justice sold this change as being more friendly to student loan borrowers, it was feared that it would turn out to be equally if not more restrictive.
Indeed- nearly ten months after the rollout of this program, it was reported that fewer than 45 borrowers (perhaps significantly fewer) received any sort of relief, out of 460 who had tried. This is a “success” rate of less than 10%. Bear in mind that the other 90% of borrowers who attempted this were required not only to file bankruptcy, but also to pay additional thousands to initiate the adversarial process, so that they could find out if the Department of Education agreed with their claim of undue hardship.
The announcement from DOJ and ED claimed that “The vast majority of borrowers seeking discharge have received full or partial discharges.“
First, the obvious: Roughly 200,000 people with student loan debt file for bankruptcy every year. Surely most hope to (and thus are seeking to) discharge their student loan debts when they file. Even if all 632 filers received discharges, this is only a 0.03% discharge rate. So the claim that “virtually all” are getting discharges is not only false, the opposite is true!
Second: Only a small fraction of the 632 filers in question are getting discharges! Note the next sentence in the announcement, “…In 99% of cases where courts have entered orders or judgments to date, the government recommended, and the court agreed to, a full discharge or partial discharge.”
This 99% “success” rate applies only to cases for which a judgement/order has been entered. Neither the Departments of Justice or Education have said how many cases that is. The previous reporting of “less than 45” full or partial discharges indicates that this is a small fraction of the 632 cases. They provide no information about the disposition of the remaining cases. It could very well be that the borrowers were coerced into Income Driven Repayment plans, or other avenues where the debt was not discharged.
So, this announcement actually provides no meaningful answers about how effective this process is, and at most the true discharge rate for student loan borrowers who file bankruptcy is only a fraction of a percent! This only provides the mainstream media with a misleading headline that they are overwhelming the zeitgeist with.
Interestingly, virtually all of the headlines we’ve seen are cleverly worded to malign student loan borrowers. A few examples (note the verbs, like “walking way”, “offloading”, “getting rid of” etc.) in the headlines:
This new bankruptcy process only gives bankruptcy attorneys a “golden carrot” to wag in front of desperate student loan borrowers, convinced them to both file for bankruptcy (which is both shameful and expensive), pay several thousands more to initiate an adversarial proceeding which will, in all likelihood, not be successful. This sets families like this one up for all of the shame of a bankruptcy, with none of the relief.
This is immoral and cruel. People should be wary, and not be fooled by this craven, shameful trickery.
Congress has a duty to reinstate the right of bankruptcy to student loans as it exists for all other loans. The Democrats, in fact, have a longstanding promise to return bankruptcy protections to student loans, but they blatantly betrayed borrowers at the 11th hour of the last congressional session by abandoning bipartisan legislation (S.2598, HR. 9110) that would have achieved this. While some Republicans have voiced support and even sponsored legslation that would return this constitutional right in year’s past, we have yet to see any meaningful legislation to this end in the House of Representative, nearly 1 year into this congressional term.
President Biden should scrap this new process, and order the Departments of Education/Justice, and their contractors to simply stop opposing federal student loan borrowers in adversarial proceedings. “Undue Hardship” is sufficiently vague and ambiguous to justify this action, and thus student loans would revert to being treated the same as all other loans in bankruptcy proceedings.
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