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Senate Democrats urge changes for student loan borrowers in bankruptcy

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When the Education Department told Congress last year it was revising a restrictive bankruptcy policy for federal student loans, some lawmakers assumed the agency would end its aggressive challenges in pending cases.

Yet as recently as March, the department was still contesting requests for bankruptcy discharges from people deep in debt and short on resources, according to court documents.

Now the Biden administration is facing pressure from Senate Democrats to change how it handles those requests. Their concerns follow a case that sparked a public backlash after the department tried to fight the court-approved discharge of debt held by a man suffering from epilepsy, a case first reported by the Lever. The department dropped the appeal in February, but some senators say the case was an exception to the standard practice.

Education, Justice Depts. reconsidering stance on fighting student loan borrowers in bankruptcy

A scan of recent bankruptcy cases involving student loans appears to support their conclusion. Justice Department attorneys representing the Education Department opposed several discharge requests in March, including one involving a 77-year-old retired nurse struggling to repay about $42,000 in student loans.

“While a bipartisan effort is underway in Congress to reform the bankruptcy code’s treatment of student loans, changes to administrative policies … are also necessary and long overdue,” a group of 27 Senate Democrats, led by Sen. Richard J. Durbin (Ill.), wrote in a letter to Education Secretary Miguel Cardona and Attorney General Merrick Garland on Thursday.

The Education Department confirmed receiving the letter and said the agency is committed to revising its approach to ensure that borrowers get a fair shot at bankruptcy discharge.

Discharging education debt through bankruptcy is difficult. People must bring a separate lawsuit, known as an adversary proceeding, convince the court that the debt would impose an “undue hardship” and fend off the lender from thwarting their effort.

The Education Department, as the creditor for $1.6 trillion in federal student loans, has the right to contest a bankruptcy discharge to maintain the fiscal integrity of the lending program. Congressional Democrats and advocacy groups, however, say that, given the hurdles borrowers must clear for the court to even approve their claim, there is no need for the federal agency to add another hurdle.

Biden administration promised bankruptcy reforms. So why is it still fighting student loan borrowers in court?

In Thursday’s letter, the lawmakers asked the Education and Justice departments to set practical thresholds for a bankruptcy discharge. The agencies, they said, could forgo contesting a request in instances of disability or poverty. The lawmakers also argue that a borrower’s participation in a repayment plan tied to their income should not preclude a claim of undue hardship.

“All too often, ED and DOJ oppose undue hardship discharges … requiring debtors to effectively demonstrate a certainty of hopelessness before they can obtain relief,” the senators wrote. “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.”

Cardona has acknowledged the challenges borrowers face in seeking relief through bankruptcy. In March, he tweeted that the department is “working to change our policies so that bankruptcy is an option for those struggling with student debt.”

“To ensure that every borrower can benefit from these changes, we have asked [the Justice Department] to request a pause of any active bankruptcy case if the borrower wishes,” Cardona wrote.

Senate Democrats in their letter also questioned whether the Justice Department has issued guidance to its attorneys handling active bankruptcy cases about borrowers having the option to temporarily table their cases during the pandemic. They also asked for information about public outreach to ensure that borrowers and their attorneys are aware of the option.

Education Dept. shows limits of pandemic relief by fighting borrowers in bankruptcy

Over the past decade, the Education Department has considered revising its bankruptcy policy several times. In 2018, the department asked the public for feedback on whether updates were needed. The agency questioned whether borrowers were being discouraged from seeking help because its standard was too prohibitive.

While the department could better define what constitutes undue hardship, Congress must ultimately do the heavy lifting to change how student loans are treated in bankruptcy.

Durbin, chairman of the Senate Judiciary Committee, and Sen. John Cornyn (R-Tex.) have sponsored a bill that would allow borrowers to discharge their federal student loans through bankruptcy after 10 years, similar to old bankruptcy rules. The bipartisan interest from lawmakers and the administration in bankruptcy changes is reviving the movement, after years of failed efforts to streamline the process.

President Biden, who helped impose tougher consumer bankruptcy laws as a senator, said on the campaign trail he now supports letting people who enter bankruptcy discharge their student debt — a position that girds the department’s efforts.

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