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Making Bankruptcy an Option for Student Loan Debt Relief

Alista Lineburg is not a lawyer, but she assumed the role when she couldn’t find one to help her discharge $146,000 of federal student debt in bankruptcy. The process requires a separate lawsuit against the government, something that many lawyers refuse to take on given the time, expense and difficulty of winning.

Ms. Lineburg, 49, knows this all too well. Even when the bankruptcy court tried to assign her counsel, there were no takers. “The attorney called and she said, ‘You can’t win this,’” Ms. Lineburg recalled.

So she pressed on, alone.

And, despite the odds, she won her case.

“I feel like I can finally get ahead,” said Ms. Lineburg, who lives in Fairport Harbor, Ohio. She was laid off from her information technology job in June, just two months after clearing her decades-old debt, from an undergraduate degree and a master’s in business administration.

Unlike credit card, medical and other consumer debts, student loans don’t automatically disappear in bankruptcy. Debtors need to take an extra legal step — both challenging and costly — known as an adversary proceeding.

But more people in bankruptcy are beginning to use a legal process introduced in November by the Biden administration that is supposed to make the ordeal easier, fairer and more transparent by establishing clearer legal standards and allowing debtors to present their case on a simplified form.

Ms. Lineburg started her proceeding last summer and may have benefited when the new legal pathway was introduced in the fall.

“This is a game changer,” said Latife Neu, a bankruptcy and student loan lawyer in Seattle who has successfully used the new pathway on behalf of clients. “This is a tool that has been missing from my toolbox for the entirety of my career. The new process is less risky and less expensive. We can project whether the borrower has a good chance of success before the case is ever filed.”

The longstanding position of prior administrations has been to fight nearly every case in which a borrower was seeking to discharge their debt. The Department of Justice hasn’t entirely backed down, but in coordination with the Education Department, it has provided guidelines to its army of government lawyers on which circumstances would permit a discharge to debtors, who can now detail their financial situation on a 15-page attestation form.

Malissa Giles, a consumer bankruptcy lawyer in Roanoke, Va., has filed six attestation forms so far, winning three full discharges and expecting more. She called the turnaround “huge.”

But experiences with the application have been somewhat mixed. Some consumer lawyers report that the guidelines are being implemented unevenly, making them feel as if the fate of their case depends on the government lawyer they are assigned. Others have said they understand that the early days will be bumpy, because all parties are clumsily figuring out how the process works.

More student debtors in bankruptcy may be motivated to try, now that the White House’s plan to cancel up to $20,000 in federal debt has been derailed by the Supreme Court, and federal loan payments will come due again after a three-year pause.

That’s not usually the case. In each of the five years before the pandemic, roughly a quarter-million people who had student debt filed for bankruptcy, according to a 2020 analysis by Jason Iuliano, an associate professor of law at the University of Utah. But only a tiny fraction of them — less than 1 percent — filed an adversary proceeding to seek a discharge. That’s just 480 people annually, on average.

After the new process was introduced, 460 adversary proceedings were filed by the end of July, according to the Education Department. That’s up from 338 the month before, a 36 percent jump. Two-thirds of those borrowers were using the simplified process.

Professor Iuliano said that the pace was cause for “cautious optimism” but that there were tens of thousands who are eligible and haven’t filed.

Most of the new cases, however, haven’t been settled — and they’re moving slowly. Since mid-November, less than 45 debtors have received a full or partial discharge, according to the Education Department’s recent response to an information request from the National Student Legal Defense Network, an advocacy group.

“It is life-changing for the people affected, but it is still not having the impact of the systematic change that was the goal,” said Aaron Ament, the president of the advocacy group.

A spokesman for the Education Department said that “the number of cases where borrowers will receive relief will grow as courts continue to issue final decisions.”

Marilena Burdett, 64, squeaks by on a monthly Social Security check of roughly $1,000. Until May, she had $105,000 in student debt from a two-year degree that took more than three decades to complete. There were too many stops and starts to count, punctuated with obstacles along the way: Divorce. A custody battle. Thyroid cancer that remained undiagnosed for three years. Job loss. A fight with a community college to release a transcript.

Ms. Burdett, who lives in Silverton, Ore., eventually received her associate of arts degree in 2016.

After filing for bankruptcy last summer, she started the legal proceeding to discharge her student debt in October, the month before the simpler process became available.

Like Ms. Lineburg, she started the process on her own. But after the court paired her with a pro bono lawyer, he helped her assemble the attestation form in early February.

“You fill in the blanks to explain your circumstances and why you think you can never repay the loan, or explain the hardship it would impose, which in my case, seemed obvious,” she said, adding that her monthly payments exceeded her Social Security check.

Her debt was discharged three months later.

But there are still concerns for debtors whose cases may have more shades of gray. Even with the clearer guidelines, the new policy still uses the same legal standard that discouraged borrowers from bringing the cases.

Discharging student debt has become far more difficult over the past four decades. Borrowers must demonstrate that their loans create an “undue hardship” — a standard that has been interpreted differently across the country. Most courts use a rigid standard known as the Brunner test, which is named for the 1987 case that established it: Marie Brunner filed for a discharge of her debt less than a year after she had completed a master’s degree.

The case created a three-part test: Is the debtor unable to maintain a minimal standard of living while making the payments? Has the debtor made a good-faith effort to pay the loans? And is the debtor’s situation likely to persist for a significant portion of the repayment period?

Under the new guidelines, each piece of the test becomes easier to pass if the debtor can check certain boxes. For example, if a debtor’s expenses equal or exceed their income, they may satisfy the first question. Being over age 65, or having loans in repayment status for at least 10 years, for example, would fulfill the last question.

Indeed, not all cases will be so clear cut.

Karen Bentley, a consumer bankruptcy lawyer with Neeley Law in Chandler, Ariz., said receiving discharges was much easier for debtors with circumstances hewing closely to those laid out in the guidelines.

“We can show the debtor never graduated. The loans are 10 years old. We have a more clear definition of what a medical hardship will look like,” she said.

But “most people don’t fit into that cookie-cutter mold, and I know that is where I am running into difficulty,” Ms. Bentley added. She has one client who has received a discharge, several others who are close and 14 other cases in the works.

George Thomas, a lawyer based in Leawood, Kan., said his clients, a couple in their 50s with more than $300,000 in debt from a pair of associate’s degrees, were denied a discharge through the new form. Part of their student debt — private debt and loans made through the Federal Family Education Loan program — wasn’t even eligible for the new process.

“They are pushing the low-hanging fruit through the conveyor belt, but they are not making the bold adjustments to address the problem in a comprehensive way to move the needle,” Mr. Thomas said.

Ms. Lineburg, who won her lawsuit to clear $146,000 in student debt without a lawyer, started her case in June 2022. But after the new attestation form became available five months later, the bankruptcy judge presiding over the case said the two parties should try the simplified method before going to trial. He postponed the trial to the following April.

It wasn’t an easy case. Ms. Lineburg said she had been earning around $80,000 before taxes, enough to raise questions about her ability to pay in the future.

“They were telling me it wasn’t so cut and dried,” she said. She began to think the government might release only a portion of her debt, which she began borrowing in 2004, when she was about 31, through 2011.

Ms. Lineburg attended Lake Erie College with hopes of moving beyond factory floors and retail jobs. While attending classes, she worked in the college’s financial aid office and later in its information technology department. She knew nothing about I.T., but it piqued her interest and she used the opportunity to learn. She later moved into a more advanced role there.

But when she left that job to start an I.T. consulting business, she said, she accumulated credit card and other debts. She went back to work for an employer, earning roughly $40,000.

“I exhausted all of my resources trying to start a business,” said Ms. Lineburg, who has three grown sons. “I had to get back into the field. I had to help my boys through college. It got out of hand. It was just a tough time.”

That led to her bankruptcy filing, and she was able to reopen her case to file the adversary proceeding last year.

The government lawyers asked to see her earnings history and proof that she had mobility issues. She provided a note from a doctor stating that she had a degenerative hip condition and sent her earnings history from the Social Security Administration, which showed she had been earning much less for most of the past 15 years before her case.

“That was a crucial document,” she said of the earnings statement, adding that it also helped that the judge, who was retiring, kept the negotiating parties on a schedule and oversaw their mediation until Ms. Lineburg’s debt was discharged.

Tammy Branson, a senior paralegal at Branson Law in Orlando, Fla., is hopeful about what she called the biggest change to consumer bankruptcy in two decades.

“Will we wipe them all out? Probably not, but if we even get a partial discharge where they can afford to pay some of it back and discharge the difference, that’s a great result,” she said.

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