Biden Administration Urges Supreme Court to Pass on Student-Loan Bankruptcy Case
Justice Department says Texas woman’s appeal is premature because Department of Education is reviewing whether to relax rules governing student debt in bankruptcy proceedings
- The Biden administration wants the Supreme Court to pass on an appeal seeking to ease the way for more borrowers to erase their student-loan debt in bankruptcy, saying the Department of Education is already examining the issue.
The reasoning was laid out in a court filing Friday by the Justice Department, representing the latest front in efforts from the White House, Congressional Democrats and the U.S. court system to address student-loan debt. An estimated 43 million Americans have federal student loans, the total amount of which has nearly doubled over the past decade to about $1.7 trillion.
Student loans are difficult to discharge through a bankruptcy filing. To qualify for a bankruptcy discharge, borrowers must prove they face an “undue hardship” from their student debts, such a stringent standard that few even try.
The Supreme Court is considering whether to hear an appeal from a Texas woman seeking to loosen those standards after she filed for bankruptcy at age 60 with about $345,000 in student-loan debt—about half of which represents fees and interest. Thelma McCoy’s lawyers are asking to apply a more forgiving test, used by bankruptcy judges in some states, that would make it easier for those in extreme financial hardship to discharge student loans in bankruptcy.
Acting Solicitor General Elizabeth Prelogar said in Friday’s filing that the appeal is premature because the Department of Education is evaluating whether to relax the government’s stance on when borrowers should be able to discharge student loans. That review was started in 2018 by the Trump administration.
The Education Department “may revise its regulations and related policies in the future,” the Justice Department filing said.
The Justice Department also said the woman’s case wouldn’t be appropriate for considering a nationwide standard for student-debt discharge because of procedural problems in her appeal unrelated to her student-loan issues.
Kory DeClark, a lawyer representing Ms. McCoy, said Monday that he and his client were disappointed in the government’s decision to oppose a Supreme Court review of her case in light of the longstanding split between federal appeals courts on what bankruptcy test to apply when determining if a borrower can discharge their loans.
“The approach followed by most courts of appeals lacks grounding in the statutory text and makes it all but impossible for even the most deserving debtors to qualify for discharge,” Mr. DeClark said.
The problem is both pressing and of national importance and there is no indication of whether or when the Education Department might revise its policies, Mr. DeClark said.
While bankruptcy rules prohibit all but the most-dire cases from erasing student debt, some judges in recent years have been re-evaluating whether certain borrowers deserve relief.
Ms. McCoy, who has raised four children, filed for chapter 7 protection in 2016. She took on debt when she returned to school in her early 40s, earning a bachelor’s degree from Louisiana State University and a master’s degree in social work from the University of Houston. She incurred most of her debt to complete her Ph.D. in social work from the University of Texas, according to court papers.
As she finished her degree, Ms. McCoy suffered several physical and financial hardships and was unable to find steady employment despite applying for nearly 200 jobs in and out of her field of study.
In December 2007, Ms. McCoy and her son were severely injured after her car was struck head-on by a drunk driver. Her son required multiple emergency surgeries and was placed in a medically induced coma while she needed to use a wheelchair for more than two years. Ms. McCoy also suffered from PTSD and anxiety as a result of the crash, according to court papers.
Ms. McCoy filed a lawsuit against the Department of Education in 2016 to discharge her student-loan debt but was unsuccessful. A bankruptcy judge ruled in 2017 that Ms. McCoy didn’t meet the requirements of the stringent test applied in Texas courts, determining she didn’t meet the high bar because it was possible she might find better employment in the future, according to court documents.
The appeal has been closely followed by consumer-rights advocates and bankruptcy academics who have urged the Supreme Court to take her case and issue a national rule friendlier to troubled borrowers. In Texas, “debtors have little to no chance of receiving a discharge of their student loan debt,” the National Consumer Bankruptcy Rights Center said in a court filing.
Congressional Democrats introduced legislation earlier this year that would overhaul the nation’s consumer-bankruptcy laws and could open the door for debtors to cancel student loan debt. President Biden, meanwhile, has considered forgiving some student-loan debt through executive action.
The White House at the start of the year also extended a moratorium on federal student-loan payments as part of Covid-19-related financial relief efforts. [as reported in 5/10/21 Wall Street Journal]