New Bankruptcy Process for Student Loans is Proving to be a Cruel, Dangerous Joke for Borrowers.
Undue Hardship remains, is only transferred from open court to the bowels of the Administrative State. As before, very few borrowers are seeing any relief.
On November 17th, 2022, the Departments of Justice and Education unveiled their long-awaited plan to stop opposing student loan borrowers in bankruptcy court. At the time, we predicted that the program would be a bitter disappointment for borrowers. And indeed- nearly a year later- the plan is proving to be exactly that. Distressed student loan borrowers should not be mislead.
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.
In the first 20 months of Biden’s term, the Department of Education teased that they would stop opposing student loan borrowers’ claims of undue hardship in bankruptcy proceedings. This would have circumvented the undue hardship clause so that student loan borrowers would essentially be treated the same as all other borrowers in bankruptcy court.
What was finally rolled out, however, was not that. In fact, it was something like the opposite of what was promised.
Instead of simply ending their opposition to student loan borrowers’ undue hardship claims in bankruptcy, the Departments of Justice and Education announced that they were introducing a new method for determining undue hardship, where the borrower pleads their claim of undue hardship to the agencies outside of court, rather than in court directly.
The new process didn’t eliminate undue hardship. It kept undue hardship completely intact. The only difference was that the borrower now must plead their case to unelected, unappointed bureaucrats (or more likely, contractors) for the Department of Education rather than a bankruptcy judge.
Make no mistake, the staffers and contractors for the Department of Education have never had any desire or intentions of cancelling or discharging loans through any of the forgiveness, Income Driven Repayment or any other programs they have administered, and this certainly has not changed.
These are the very same people who in the past have opposed student loan borrowers for outrageous reasons, such as one woman for going to McDonalds on Sundays (an unnecessary expense), or another for having a 14-year-old son who could soon get a job, and earn money to help pay for his mothers student loan debts.
This is a Department of Education whose Secretary had to be threatened with prison time by a federal judge to be compelled to cancel loans.
The undue hardship test is still there, it’s just that the Department of Education (and its contractors, likely) are now effectively the judge of this, instead of an actual judge, for all intents. Also, in order to find out if one might be determined to have an “undue hardship”, one must first both file for bankruptcy, and also pay thousands more to initiate an adversarial proceeding in order to get a “verdict” from the Department of Education (or more likely, its contractors from places like ECMC, which makes its living defeating bankrupt student loan borrowers in court).
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. After all, a growing number of judges have been more lenient in recent years in their determinations of undue hardship, and if history is any guide (not to mention financial interest), the Department of Education would like very much to preserve the predatory- and hugely profitable- underpinnings of this lending system.
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.
So trying to discharge student loans in bankruptcy is still a hugely risky, expensive and likely futile proposition.
More recently, the Departments of Justice and Education announced that “The vast majority of borrowers seeking discharge have received full or partial discharges.” This is a heinously misleading- if not utterly false- claim that is being shameless parroted by the mainstream media, who are now publishing scores of headlines that both perpetuate this misinformation and malign the borrowers.
The new bankruptcy process only gives bankruptcy attorneys a “golden carrot” to wag in front of desperate student loan borrowers, convince 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 moral duty to reinstate the right of bankruptcy to student loans as it exists for all other loans. The Democrats 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 them introduce any meaningful legislation to this end in the House of Representative, nearly 1 year into this congressional term.
If either/both parties want to gain/regain the trust they have lost with the 42 million distressed student loan borrowers in the country, they will return the constitutional right of bankruptcy- as it exists for all other loans- to student loan borrowers, who now comprise the largest politically untethered voting bloc in U.S. History.
Until that happens, 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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