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

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

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 forgiven when a debtor goes through bankruptcy proceedings. Debtors must prove they would suffer “undue hardship” from the loans, a standard which has been very difficult to meet.

Compounding the situation is the way the government is challenging these debtors in court, lawmakers — led by Senate Majority Whip Dick Durbin (D-IL), chairman of the Senate Judiciary Committee, Chief Justice Senate Majority Chuck Schumer (D-NY) and Sen. Patty Murray (D-WA) — emphasized in a letter to Education Secretary Miguel Cardona and Attorney General Merrick Garland on Thursday.

Typically, in personal bankruptcy cases involving student debt, a judge applies the Brunner test — a three-pronged test applied to student borrowers who commence adversarial proceedings to discharge student debt — to determine whether specific student loans caused a borrower undue hardship.

“The federal government’s aggressive legal challenges against students pursuing undue hardship claims further exacerbate this situation,” they said.

“Too often,” the letter continued, “[Department of Education] FROM and [Department of Justice] The DOJ opposes undue hardship discharges in adversarial bankruptcy proceedings, requiring that debtors actually demonstrate certainty of desperation before they can obtain relief. Clearing this statutorily unnecessary high bar is hard enough for people represented by experienced attorneys. It is practically impossible for those who are not represented.”

Consumer advocates welcomed the decision to push the two agencies to act. Aaron Ament, president of Student Defence, argued that student borrowers legally declared bankrupt “should not automatically face government opposition to the cancellation of their student loans”.

“Coming against bankrupt student borrowers costs the Department dearly and only fuels their financial turmoil,” he said in a statement. “This is the opposite of the role the Department should be playing. We appreciate the support of the Senate on this critical issue and again call on the Department of Education to quickly reform its bankruptcy policies to better support student borrowers.

Senator Dick Durbin presides over the third day of Supreme Court confirmation hearings for Justice Ketanji Brown Jackson on March 23, 2022. REUTERS/Kevin Lamarque

Debtors “through the wringer”

Senator Elizabeth Warren (D-MA), a leading proponent of student loan forgiveness, previously told Yahoo Finance that the US bankruptcy system is “fundamentally wrong” when it comes to student debt forgiveness. .

In the past, student debtors have successfully acted as their own lawyers and negotiated writedowns on their loans, as Yahoo Finance previously reported. A California woman with over $350,000 in student debt saw 98% of her loans paid off in October 2021.

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

“The Department for Education should define undue hardship in a much more debtor-friendly way so that we don’t ask people to put themselves on probation like that, and the department stops objecting to release of obviously unrepayable debt,” he told Yahoo Finance previously.

A bipartisan bill might be able to fix that – called the “FRESH START Through Bankruptcy Act of 2021,” the legislation aims to better enable borrowers to seek student loan discharge in the event of bankruptcy by allowing federal loans to become eligible for discharge in bankruptcy proceedings 10 years after the borrower’s first loan repayment is due. (Borrowers with loans less than 10 years old should follow the current process.)

Aarthi is a reporter for Yahoo Finance. She can be contacted at [email protected] Follow her on Twitter @aarthiswami.

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