Should student loans be discharged in bankruptcy?

When I served as an Assistant United States Attorney, I was tasked with defending student loan adversary cases against the federal government in bankruptcy court and got a real insider's view of how student loans are serviced. It was not pretty. Student loans do not qualify for a general discharge in bankruptcy. A debtor must file and successfully prosecute an adversary proceeding (the equivalent of a lawsuit in bankruptcy court) to discharge student loans.

I remember being screamed at by private student loan servicers ("Wait, I did tell them I'm an AUSA representing the government, didn't I?"). In those instances when I was finally able to obtain records from servicers, I often found them to be inaccurate and, sometimes, even fanciful. I discovered that some of the servicers did their best to make it hard for student loan obligors to use bankruptcy to discharge their student loan debts. Among other things, they granted unasked-for forbearances that, at the time, prevented debtors from being able to prove the necessary repayment time periods they needed to secure discharges of their student loans in bankruptcy.

I'd like to think that things have changed and that the servicers the government is using are all above board and following the law. Hope springs eternal. Unfortunately, I fully expect that when my almost-middle-aged son finishes his payments under his Income Contingent Plan, the servicer will find some excuse to say he doesn't qualify for forgiveness of the remaining amounts. Not bankruptcy-related, but fits the pattern that I've come to expect.

As a bankruptcy judge, I saw very few student loan adversary proceedings. These cases are very difficult to win under the current version of bankruptcy law. A debtor must prove it is an "undue hardship" to repay the loans. But, if a debtor can afford a lawyer, shouldn't they be able to pay something on their loans? If the debtor is young and just beginning their career, shouldn't they cool their heels in an Income Contingent Plan until their income increases? If they are living a certain lifestyle, shouldn't they redirect some of that money to their student loans? If they qualify for a better job, shouldn't they take it?

Indeed, some bankruptcy debtors are not sympathetic when it comes to discharge of their student loan obligations. However, many, if not most, are truly down-and-out and deserving of a discharge of all or some portion of their loans. But the daunting task of filing an adversary proceeding and winning it is almost insurmountable, so most don't bother.

This situation was not always the case. Before 1976, bankruptcy debtors could discharge student loans just like other unsecured debts. An adversary proceeding wasn't required. However, through various changes in bankruptcy law over the years, student loans have become almost impossible to discharge.

While I do not in any way claim the right to speak for bankruptcy judges in general, I believe that most bankruptcy judges dislike where we are now.

One of the reasons the current situation is untenable is that student loan obligors are aging. As was recently noted in the New Yorker, of the 45 million Americans who have student loan debt, one in five are more than 50 years old. Between 2004 and 2018, student loan balances for borrowers over 50 increased by 512%. And student loan debtors over 65 default at the highest rates.

My experience on the bench reflected the aging of student loan obligors. Not only were debtors carrying huge student loan debt burdens for their own educations, but many also had substantial parent loans. I remember one very successful couple with so much parent student loan debt that they had sold their home, moved cross country to increase their income, moved into a small apartment, and then filed bankruptcy. They had no hope that the loans would be forgiven through bankruptcy, so they didn't even bother to file an adversary proceeding. But there's no denying that the student loan debt was the impetus for their filing and led to them receiving a discharge of other debts. Had they not had so much student loan debt, they would not have filed bankruptcy and these other debts would have, in all likelihood, been paid. This was not at all an unusual set of facts. Therefore, while not intuitive, it's undeniable that as things stand now, regular unsecured creditors often end up having their debts discharged because student loan debt is, for all practical purposes, non-dischargeable.

A Senate bill to change things has been stalled since last year. The bipartisan Fresh Start Through Bankruptcy Act (S. 2598) would make federal student loans eligible for discharge 10 years after the first loan payment becomes due. It would retain the undue hardship standard for loans due for less than 10 years. Would this take us back to "unaskedfor" forbearances? There are some controversial cost-sharing provisions that may condemn the bill, but since Congress tends to run away from anything related to bankruptcy, the fact that any bill was proposed at all is worth noting.

As someone who paid my student loan obligations, both as a student and parent, I understand why some people are not sympathetic to changing bankruptcy law to allow for more student loans to be discharged. As a matter of fact, I don't think anyone should have to file bankruptcy because of crushing student loan debt, so I'm fine with not making any changes to bankruptcy. Rather than encouraging student loan obligors to file bankruptcy (and then also discharge other types of debts), wouldn't it be better to fix our broken student loan system? Can we start by forgiving substantial amounts of the outstanding loans that are affecting the lives of our fellow Americans, including the increasingly large number of older student loan obligors? In my opinion, that is what would be best for our country. As an alternative though, I'll support changes to bankruptcy law that would give them a break. Not ideal, but a start. A fresh start.

Hon Catherine E. Bauer (Ret.), United States Bankruptcy,, Central District of California, is a neutral with Signature Resolution in Los Angeles. The opinions stated are solely those of the author.