Senate Democrats question education, justice departments. management of bankrupt student borrowers

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Now the Biden administration is facing pressure from Senate Democrats to change how it handles those demands. 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 with epilepsy. The department dropped the appeal in February, but a group of senators said the case was an exception to common practice.

An analysis of recent bankruptcy cases involving student loans seems to support their conclusion. Justice Department lawyers representing the Department of Education opposed several release requests in March, including one involving a 77-year-old retired nurse who was 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, administrative policy changes … are also needed and long overdue,” a group of 27 Senate Democrats, led by by Sen. Richard J. Durbin (Ill.), wrote Thursday in a letter to Secretary of Education Miguel Cardona and Attorney General Merrick Garland.

The Department of Education did not immediately respond to requests for comment.

It is difficult to discharge education debt through bankruptcy. Individuals must bring a separate legal action, known as adversarial proceedings, and convince the court that the debt would impose “undue hardship” and prevent the lender from frustrating its efforts.

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

In Thursday’s letter, the lawmakers asked the department and the DOJ to set practical thresholds for a bankruptcy discharge. Agencies, they said, could waive contesting a claim if there is disability or poverty. Lawmakers also argue that a borrower’s participation in an income-related repayment plan should not prevent an undue hardship claim.

“Too often, the ED and DOJ oppose undue hardship releases … requiring debtors to effectively demonstrate certainty of desperation before they can obtain relief,” the senators wrote. “Raise this statutorily unnecessary high bar is difficult enough for people represented by experienced lawyers. It is practically impossible for those who are not represented.

Cardona recognized the challenges borrowers face in seeking relief through bankruptcy. Earlier this month 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 asked [the Justice Department] request a pause from any active bankruptcy case if the borrower wishes,” Cardona wrote.

In their letter, the Senate Democrats also asked if the Justice Department had given guidance to its attorneys handling active bankruptcy cases regarding borrowers having the option to temporarily file their cases during the pandemic. They also requested information on public outreach to ensure borrowers and their attorneys are aware of the option.

Over the past decade, the Department of Education has repeatedly considered revising its bankruptcy policy. In 2018, the ministry asked the public if any updates were needed. The agency interrogates if borrowers were discouraged from seeking help because its standard was too prohibitive.

While the department could better define what constitutes undue hardship, Congress ultimately needs to 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.) sponsored a bill that would allow borrowers to repay their federal student loans through bankruptcy after 10 years, like the old bankruptcy rules . The bipartisan interest of lawmakers and the administration in bankruptcy reform is reviving the movement, after years of unsuccessful efforts to streamline the process.

President Biden, who helped push through tougher consumer bankruptcy laws as a senator, said on the campaign trail that he now supports letting people who go bankrupt pay off their debt student – ​​a position that reinforces the efforts of the department.

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