Bankruptcy Uncoded: The Biden Administration's New Changes
February 2023 | Jenifer Lissett (Staff Writer and Editor)
I. Introduction
Student loans are a staple of higher education in this era. 43.5 million borrowers alone have federal student loan debt. [1] The amount of student loan debt in 2022 was $1,757,200,000,000, and the average amount of student loan debt is $37,574 per student borrower. [2] Furthermore, the average public university student will take out a whopping $31,410 to obtain their bachelor's degree. [3] All of these numbers reveal the massive amount of debt that students in the United States incur to attend school. Many of them will not go into million-dollar careers, leaving them to spend their adult lives paying off student loans. Given the enormity of this issue, borrowers push for federal student loan forgiveness programs—but most of the laws do not come off the ground. This article will explore one new avenue for borrowers to discharge their student loans via bankruptcy. Section II will define the basics of the U.S. bankruptcy code. Then, Section III will shift to defining the previous standard before the Biden Administration changed their guidelines of federal student loans and bankruptcy. Finally, Section IV will detail the Biden Administration’s guideline changes to bankruptcy and federal student loans.
II. What is a debt and how does bankruptcy get rid of it?
According to 11 U.S. Code § 10—the set of U.S. laws that govern bankruptcy proceedings—a debt is a “liability on a claim.” [4] To further clarify, a liability is used in a context where there is a risk in entering into a contract. For example, a creditor, or someone who loans a consumer money, enters into a contract where they face a loss if the consumer does not pay back the debt. [5] Although, a debt is more inclusive than this and can involve a consumer owing money to a friend or family member. A contract is not a required feature to owe someone a debt.
These types of debts are considered consumer debts, or, in other words, these are not associated with businesses. Everyday people take out loans, charge purchases to their credit card, or borrow money from an acquaintance. If people become incapable of paying these debts, consumers can file for Chapter 7 or Chapter 13 bankruptcy to discharge, or end their liability, in order to pay the debt back to the creditors. [6] Moreover, if a consumer cannot pay these debts back, it is fairly easy within the bankruptcy code to discharge them.
A consumer also has to pay attention to the distinction between an unsecured debt and a secured debt. Most consumer debts listed above fall under the unsecured loan bracket, as these debts do not have any physical property attached to them. [7] For example, a car loan or mortgage is a loan that is secured because there is physical property attached to the loan. The bank or lender has ownership of the property until it is paid off. On the other hand, credit card debt or payday loans are unsecured because there is no property attached to the loan. In those cases, a bank lent money to a consumer under the knowledge that it would be a standard loan with the expectation that it would be paid back. [8]
III. Student Loans and How it Differs.
Student loans in bankruptcy are more complex to discharge than regular unsecured consumer debts. Consumers have to go through a tedious system to try and meet a difficult standard of “undue hardship.” Undue hardship is an ambiguous standard that does not have a set definition. [9] One consumer can meet the standard by having constant medical debt; however, in a different district, another consumer who is in a similar situation may not meet this standard. In some states, it is up to consumers to prove a “certainty of hopelessness,” which is an extra burden in addition to proving undue hardship. [10] As a result of this vague standard, most student loans are not discharged in bankruptcy.
Previously, when a consumer wanted to discharge a student loan in bankruptcy, they would have needed to initiate an adversary proceeding against the student loan provider. [11] An adversary proceeding is, essentially, a lawsuit tried in bankruptcy court. [12] A consumer sues their student loan provider and fights their student loan at the adversary proceeding. [13] This process is costly to the consumer, though, as they will have to hire private attorneys to represent them. Consumers also have to fight against the seemingly endless onslaught of paperwork from the student loan provider’s legal team.
Conti v. Arrowood Indemnity Co. (2020) proves that the "undue hardship” student loan standard was an acceptable standard that the higher courts were not willing to change. In Conti v. Arrowood Indemnity Co., (2020) the plaintiff listed her private student loans in her bankruptcy and initiated an adversary proceeding to show that these student loans did not meet the student loan definition of bankruptcy. [14] The plaintiff tried to limit what could be considered a student loan, but by deciding to not hear the case, the Supreme Court of the United States asserted that the current student loan definition in bankruptcy and their dischargeability is acceptable. [15]
That said, consumers have another way of getting rid of their student loans without starting an adversary proceeding against their student loan providers, but it is very narrow in its application. Federal student loans can be discharged if they meet any one of the following conditions: (1) a student takes out a federal student loan to attend an unaccredited program or university, or (2) a student took out a student loan that surpasses the cost of attendance. If a consumer meets any of these conditions, then they, if included in their bankruptcy petition, can have these loans discharged. However, this is not always the case. Many student loan providers take advantage of the stringent undue hardship standard and do not file a claim with bankruptcy courts, meaning consumers assume they still owe the debt because it was not dischargeable. Consumers will continue making payments and student loan providers will continue collecting. This is all due to the ambiguous nature of the undue hardship standard. There are current cases, such as Fennell, v. Navient Sols. (2022), trying to fight against this abuse from student loan lenders. [16]
IV. Biden Administration’s Changes to Bankruptcy and Federal Student Loans
The Biden Administration, in their plight to ease the burden of student loans, loosened the undue hardship standard that consumers with federal student loans had to meet. The Biden Administration, along with the Department of Justice (DOJ) and Department of Education (DOE), will not oppose adversary proceedings that are dealing with discharging student loans. The DOE and their attorneys will review a plaintiff’s case information, “apply the factors courts consider relevant to the undue-hardship inquiry,” and determine whether to allow the adversary proceeding to be unopposed. [17] In other words, consumers who file an adversary proceeding against federal student loan providers can discharge their loan without having to go through the entire adversary process. [18] The DOE, after reviewing a consumer's claim, will simply not file a motion of opposition to the adversary proceeding. [19]
The Biden Administration’s changes make the process of discharging federal student loans much easier and less burdensome to consumers who are already facing other financial hardships. Consumers will not have to accrue more debt, especially in the form of attorneys fees, while trying to get rid of their debt. [20] Also, consumers, when filing for bankruptcy, can rid themselves of all their debt rather than have to keep their substantial student loan debt. In all, this is a step in the right direction for consumers to rid themselves of all debts.
V. Conclusion
The Biden Administration, the DOJ, and the DOE have all taken a step in the right direction for student loan forgiveness. Though they made it easier for consumers to get rid of federal student loan debt, there is still more that needs to be done. Consumers who have to file for bankruptcy solely to discharge their student loans must incur a financial burden for 7 to 10 years. Credit reporting agencies (CRAs) have the right to report bankruptcies for a minimum of 7 years and up to 10 years after the date of filing, meaning any potential creditors can deny credit for up to 10 years after bankruptcy. [21] This is a harsh price consumers have to pay to try and get rid of their federal student loans.
Not only do consumers have to deal with the negative impact of a bankruptcy on their credit report, but they must also deal with any derogatory reporting from other debts that were included in their bankruptcy. [22] Creditors can choose to report inaccurate past-due payments, balances, or statuses which, without intervention, can further affect a consumer's credit history and score. So, consumers—after going through bankruptcy—will still have to deal with the possible incorrect reporting and, without knowledge of the Federal Credit Reporting Act (FCRA), consumers may unintentionally leave it alone until the credit account and its history is removed from the credit report.
As if the negative credit impacts that a consumer faces after filing for bankruptcy were not bad enough, this change to the bankruptcy code only covers federal student loans. Just as many students take out private student loans as they do federal student loans. Students may not qualify for federal student loans, leaving them no access to discharge private student loans. This means that there are still consumers out there who have to continue to pay for their student loans just because they may have had eligibility issues in obtaining federal student loans. This highlights inequity in student loan forgiveness policies that needs to be addressed.
Without intervention from Congress, consumers can expect inconsistencies in federal student loan forgiveness as policies change from one administration to the next. [23] To give consumers protection from policy-related instability, Congress must enact a law that stipulates what the DOE must do when adversary proceedings are brought against them in bankruptcy courts. Until then, consumers have no certainty in student loan forgiveness and must deal with fluctuating policy.
Sources
Hanson, Melanie. “Student Loan Debt Statistics,” Education Data Initiative, February 10, 2023.
Ibid.
Ibid.
Bankruptcy 11 U.S. Code (2018), § 101.
Ibid.
“Bankruptcy Basics Glossary.” Bankruptcy Basics Glossary. United States Courts. Accessed March 4, 2023.
Ibid.
Ibid.
Minskey, Adam. “Biden Administration Announces Huge Bankruptcy Changes for Student Loans,” Forbes, November 17 2022.
Ibid.
Ibid.
Ibid.
Ibid.
Conti v. Arrowood Indemnity Co., 612 B.R. 877 (6th Cir. 2020).
Ibid.
Fennell, v. Navient Sols., 2:22-cv-01013-CDS-NJK EMD.
Minskey, Adam. “Biden Administration Announces Huge Bankruptcy Changes for Student Loans,” Forbes, November 17 2022.
Ibid.
Ibid.
Ibid.
“Bankruptcy and Your Credit Report.” Bankruptcy & Your Credit Report: Western District of Washington, February 18, 2023.
Ibid.
Minskey, Adam. “Biden Administration Announces Huge Bankruptcy Changes for Student Loans,” Forbes, November 17 2022.