A federal program has been reported to make it easier to get student loan debt discharged in bankruptcy. This is nothing new over the last two years but has been sluggish in making clear headway. At the moment, only a small number of student loan debt applicants have had their debt discharged. However the problem is not enough attorneys or judges are familiar with the process.
Federal student loans were not always so burdensome to borrowers. In 1998 the Higher Education Amendments Act made them nondischargeable in bankruptcy except in cases of "undue hardship." Prior to that law, that standard only applied for the first decade after a student graduated. Now, consumer bankruptcy attorneys say they are hopeful the new program can provide an escape hatch for the otherwise grueling standard.
After the U.S. Supreme Court dashed hopes of sweeping student loan forgiveness via executive order in 2022, the U.S. Department of Justice and U.S. Department of Education attempted to make some measure of change on their own by opening avenues for debtors to argue their debt should be discharged.
Under the new, streamlined process, a bankrupt debtor files a 15-page attestation thoroughly describing their financial situation as well as an adversary complaint against the DOE. After assistant U.S. attorneys review the case, the government may choose to stipulate that the applicant qualifies under the undue hardship standard and that it does not oppose the debt being discharged.
DOJ Promises
The new guideline does not change the undue hardship standard, but it simplifies the process and states how cases are evaluated more explicitly than before, according to the DOJ.
The DOJ released a report in November calling the new guidelines "successful," touting 632 adversary proceedings filed in the first 10 months of the program — a figure that experts told Law360 was underwhelming.
For Vivian Houghton, a Delaware-based bankruptcy attorney, the DOJ got debtors' and their attorneys' hopes up only to dash them with a process that roughly costs the same and comes with a similar level of uncertainty.
"You've got a lot of disappointed people. Disappointed but not surprised," Houghton said. "I thought the ideas were good, but we were made promises that our documents would be looked at, that it would be user friendly, and it turned out not to be true."
The DOJ said in its report that 99% of cases in which a court rendered a judgment led to some debt discharge and that the process was working well. The agency declined to answer questions sent by Law360 and to provide updated figures. The DOE referred questions back to the DOJ.
Stretto's Roitburg said of those 632 filings, only about 120 received decisions, and 84 of those borrowers received full or partial discharges — or 13% of the total. The DOJ's argument that the majority of cases in which a judgment was entered is misleading, according to Roitburg, because an unsuccessful attempt at getting a discharge will result in a dismissal, meaning the court will not enter a judgment.
Roitburg also cited separate data gleaned from the firm's analyzer tool, which showed that lawyers had used it to file 181 adversary cases from Feb. 2023 through the end of Jan. 2024, of which 142 are still pending.
Of the resolved cases, 16 were dismissed. For the 23 cases that resulted in a stipulation — leading to the discharge of $2 million worth of student loans — borrowers had to wait 162 days on average for a decision, according to Roitburg, who blamed the delays on insufficient funding.
The delays can be attributed to the time it takes for consumer bankruptcy attorneys — who are not always trained in litigation and adversary proceedings — to level up, as well as for the feds to adapt to a new approach, according to Ed Boltz, a bankruptcy attorney at the Law Offices of John T. Orcutt and former president of the National Association of Consumer Bankruptcy Attorneys.
"The Department of Ed had to staff up for this too, and had to educate all the AUSAs across the country because it was a change for them. For the longest time, if you had one of those cases where student loans were discharged, that was a loss. You'd failed," Boltz said.
The government's new mentality is more conciliatory, along the lines of, "our job is also to protect our citizens who need relief," Boltz said. "That's a win."
Lawyers Still Adjusting
Another reason for the low numbers of adversary proceedings is that consumer bankruptcy lawyers are still educating themselves on the process as well. Many are not accustomed to litigation and adversary proceedings, which are not part of the usual course of their business, Johnson told Law360.
Some attorneys are waiting for the process to have been in place for a few years to suss out the territory before they wade into it themselves, Boltz said, and others have fired off many adversary proceedings at once with less than stellar results.
"Some people have been hesitant and others have charged in too quickly," Boltz said.
An adjustment period is also going to be necessary for judges, some of whom are accustomed to viewing themselves as backstopping the federal budget and thus may be reluctant to let debtors off the hook, Boltz said.
Data analyzed by Stretto shows that the judge handling a debtor's case can affect the outcome, with some judges dismissing every case that has come before them and others granting every case.
In the early stages of the new process, attorneys may prefer to bring only their strongest and most sympathetic cases in venues where the judges have a track record of being skeptical, according to Boltz.
"We want to warm up the judges who are lukewarm with the right debtor, with a sympathetic debtor," Boltz said.
Attorneys should also make sure they know the undue hardship requirements down pat and not just argue that the debtor cannot afford to make payments.
"I tell people to make sure you know what you're doing; there's nothing that will make a judge angrier than muddling around," Boltz said. "Go in with greater preparation rather than just say, this debtor clearly can't pay their student loans."
To help the judge understand their client's circumstances, attorneys should attach a copy of the attestation to their complaint under seal, so that the judge can see it but the public cannot.
"The complaints filed in this case are not super detailed, and you still want to protect your client's privacy," Boltz said.
Ultimately, Houghton said, the real fix is not improving the adversary proceeding process but a change in legislation.
The status quo under which student loans are generally nondischargeable is only 26 years old, and it could be undone by Congress. Houghton said it should be, to undo the bind of student loan debt being treated differently than any other type of debt.
"In a Chapter 7, if you came to me with a million in gambling debt over at Delaware Park [Casino] and asked if it could be discharged, my answer would be yes. But student debt, no," Houghton said. "So you might want to give it a try and see if you can make a few bucks and pay off this student debt."
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