The federal government trumpeted the initial success of an initiative to make it easier to eliminate student loans when filing for bankruptcy — but a year later the results are more tepid than consumer advocates had hoped. The guidance from the departments of Justice and Education, introduced in November 2022, has the potential to change lives and upend nationwide standards that for nearly three decades have made it virtually impossible for struggling borrowers to get rid of federal student loans. But changing the trend has proved more complicated than advocates expected due to reluctance from lawyers and a slow-to-change system. The departments in November celebrated what they deemed a successful first year of their program designed to navigate around the notorious legal barrier to expunging federal student loan debt in bankruptcy. Within the first 10 months of the guidance, 632 bankrupt student borrowers had filed cases to have their loans wiped out, a “significant increase from recent years,” the agencies said in a press release. But some of the most fervent supporters of the change say such cases won’t make a sizable dent in the nation’s $1.7 trillion federal student debt crisis. The lackluster take-up is even more notable after President Joe Biden failed in his plan to forgive an estimated $430 billion in student loan debt, and was forced to allow student loan payments to restart following three years of a pandemic-related pause.
Alrena Dale, a 60-year-old Flint, Mich., resident, this year was able to discharge $155,000 in student loans, an unexpected blessing. “I always had to work two or three jobs after I graduated and it was exhausting, and my health started deteriorating,” the University of Phoenix graduate said. “This was truly a godsend for me.” But discharges like Dale’s are still well short of what advocates had hoped for. “I wish there were just a lot more cases,” said Matthew Bruckner, a Howard University School of Law professor and student loan discharge advocate. “Even if it’s an acceleration, it’s modest and therefore disappointing.” More substantial student loan relief in bankruptcy is being held back by sluggish government response times, opaque application of the guidance, and a general reluctance by consumer attorneys to fight what has traditionally been a losing battle, attorneys and others say. More lawyers need to file student loan discharge cases for the process to work as intended, said Edward Boltz, a managing partner with the Law Offices of John T. Orcutt and former president of the National Association of Consumer Bankruptcy Attorneys.
The initial increase in filings was encouraging, but “it still needs to be 10 or maybe even 100 times more than that,” Boltz said. “My hope is that in the next 12 months we’ll see another acceleration.” ‘Smashing My Head Into a Wall’ Previously, trying to help clients discharge federal student loans “was like smashing my head into a wall,” said Dale’s attorney, Robert Branson of Branson Law PLLC. A 1998 bankruptcy code amendment created a nearly impenetrable barrier to liberation from student loan obligations. Unlike most forms of consumer debt, which are frequently reduced or eliminated in bankruptcy, federal student debt can only be discharged in cases where the borrower can show it presents an “undue hardship.” The 2022 guidance was intended to lower that bar. Most US bankruptcy courts employ a three-prong undue hardship test that has earned a reputation for being almost impossible to satisfy, and has for decades discouraged debtors and their attorneys from even trying. To make the process more fair and accessible, a new step was created. Now, after filing a suit against the government to discharge federal loans, debtors fill out and submit a 15-page attestation form to be analyzed by the DOE and DOJ.
Government attorneys have been instructed to use prescribed standards to assess each submission and make a recommendation to the bankruptcy court for each discharge request. The DOJ can support a partial discharge in cases where the attestation may not support a complete debt elimination. “It’s almost more like mediation than litigation, even though it looks like I’m suing them,” said Branson, who filed roughly 15 discharge suits for clients last year. He said the whole process takes about nine months.
“So far it seems to be working.” Discharge proceedings more than tripled in the first 10 months compared to previous years, and the number of discharges granted has increased significantly, DOJ trial attorney Alexis Daniel told a consumer bankruptcy panel in November. For comparison, in the ten months before the guidance was issued, fewer than 180 cases were filed to discharge federal and private student loan debt in bankruptcy, according to data from Bloomberg Law. The number of personal bankruptcies filed in 2022 were near historic lows, due in part to pandemic relief measures.
The government hasn’t publicly reported the number of cases that have been fully resolved under the new guidance. But it said in 99% of new cases where courts have entered orders or judgments, the debtor has received a full or partial discharge. No ‘Hockey Stick’ George Vogl, a managing director with Stretto Inc. who markets software to assist consumer bankruptcy lawyers, said he was heartened to see an uptick in discharge adversary proceedings compared to previous years, but he had hoped to see more. Hesitancy by consumer attorneys, some of whom have never filed an adversary case, is the most significant constraint on new filings, said Vogl. But that could change once more lawyers see cases succeed, he said. “I don’t know if we’re going to see the hockey stick increase I would like to see, but I do expect substantial growth will occur,” he said.
For example, Boltz, the former head of the consumer bankruptcy group, said he wanted to take things slow and test the waters last year by bringing just two cases, both for older and more destitute clients. In addition to feeling out how federal agencies are adapting to the policy, Boltz said he’s being careful about putting new debts on his clients since it costs a few thousand dollars to litigate an adversary proceeding.
“Previously it was a herculean task, where now it’s just a headache,” he said. Intention Versus Execution Minneapolis bankruptcy attorney Andrew C. Walker of Walker & Walker Law Offices PLLC has filed 38 adversary proceedings for clients under the new guidance without asking them to pay legal fees upfront.
“Zero of them have made it all the way to a resolution,” and it’s often taking several weeks to receive an attestation form after filing a case, he said. “I imagine that’s a staffing bottleneck.” Despite the uncertainties, Walker believes the new hardship evaluation process is sensible and fair. Jeffrey Butwinick, another consumer bankruptcy attorney with his own firm based in Minnesota, has had more luck. Of 35 adversary cases he filed under the new guidance, seven have reached a final resolution with all but one ending in the debt being tossed, he said.
It was the first time in his legal career that he was able to see some success in debt discharge proceedings. But the pace seems to have slowed over the course of the year, Butwinick said.
The government’s application of the guidance doesn’t always account for struggles people are facing, particularly with regard to medical conditions and budgeting for automobile expenses, Butwinick added. DOJ attorneys also seem unwilling to compromise in cases brought by younger debtors, he said.
“I have specific concerns but overall it’s much, much better than what we had before and there are a lot of people who can benefit from the program,” he said. A DOJ spokesperson said in a statement that the agency has seen progress helping struggling borrowers eliminate burdensome debt in the first year of the guidance and that it’s committed to improving the process.
“We nevertheless appreciate that cases are not always moving as expeditiously as we would like, and we understand—including from conversations with attorneys and practitioners whose clients are going through the process—that this can be difficult for borrowers during an already uncertain time,” the spokesperson said. Political Football As the guidance enters another year, lawyers who have seen some measure of success say they plan to file more adversary cases in the months to come. If you can get a critical mass of lawyers to participate, “this will take on a life of its own,” said Branson. “I want to be the first kid on the block to wipe out 100 of these things.” Despite any shortcomings, it represents the most substantial shift by the federal government in decades to facilitate federal student loan discharges, and for that reason, it’s “a sea change,” said Walker. “There are a lot of people who are better off because of this.”