Supreme Court dismisses student loan bankruptcy case, leaving strict standard intact for now

The Supreme Court of the United States has refuse to hear a case raising questions about whether student loans can be discharged in bankruptcy, leaving a strict student loan bankruptcy standard in place for now.

The case, Conti v. Arrowood Indemnity Co., involved a borrower trying to free herself from her private student loans in the event of bankruptcy. Conti, the borrower, had attended the University of Michigan and had taken out private student loans from Citibank totaling more than $ 76,000. The loan applications identified the debt as student debt for “students attending four-year colleges and universities,” and the promissory notes stipulated that “the proceeds of this loan were to be used for specific educational expenses.” The loans were disbursed directly to the university and none of the disbursements exceeded the total cost of tuition.

In 2017, Conti filed for bankruptcy and classified Citibank’s loans as dischargeable. But the bankruptcy code treats student loans very differently from most other forms of consumer debt, such as credit cards or overdue bills. To pay off student loans in bankruptcy, borrowers usually have to prove they have an “excessive difference”, which is a difficult standard to meet. These restrictions initially applied only to federal student loans, but were later extended to cover private student loans (like those from Conti) following the passage of a bankruptcy reform bill in 2005.

The “undue hardship” standard is not well defined in law, so bankruptcy courts have established several tests, which vary by circuit, to determine whether a borrower can meet the standard. But even to try and show that they meet the “undue hardship” standard, student loan borrowers must initiate “adversarial proceedings,” which is essentially a lawsuit in a bankruptcy case brought against the lenders concerned. Adversarial proceedings can be a long and invasive process for borrowers, and can be quite expensive for those who use private attorneys. Student lenders may also have a lot more resources than borrowers, which may give them an advantage. As a result, many student loan borrowers fail to prove undue hardship, and many others don’t even try.

However, Conti filed adversarial proceedings to fail to show that she met the “undue hardship” standard for student loans. Instead, she initiated adversarial proceedings to attempt to demonstrate that the private student loans were not “eligible student loans” within the meaning of the bankruptcy code due to questions and disputes over the exact cost. education, student status and other applicable financial aid. If successful, this strategy would have allowed him to bypass the “undue difficulty” standard entirely.

However, the bankruptcy court rejected his arguments, and a federal district court and the Sixth Circuit Federal Court of Appeal upheld. The Sixth Circuit concluded that the plain language of the loan application and promissory notes made it clear that these were student loans and therefore were not dischargeable in bankruptcy, in the absence of bankruptcy. ‘proof of undue hardship.

Conti appealed to the United States Supreme Court. But dismiss the case today, the court effectively maintained the strict treatment of bankruptcy code student loans.

At the end of the day, when it comes to student loans and bankruptcy, Congress can take steps to ensure that there is real reform. Earlier this year, Senate Democrats unveiled the Medical Bankruptcy Fairness Act of 2021, which would allow student loan borrowers to pay off student debt in bankruptcy without having to prove undue hardship. The bill would make a simple change to the bankruptcy code by simply eliminating the section that treats student debt differently.

Congressional Democrats have proposed similar bills in the past, but those proposals have gone nowhere in the Republican-controlled Senate. Now, with Democrats holding narrow majorities in both houses of Congress, bankruptcy reform has a better chance of passing. But, it is not clear whether the student loan bankruptcy reform would garner sufficient bipartisan support to overcome a possible Republican filibuster.

Further reading

Biden administration will make it easier for student loan borrowers to get a mortgage

Biden administration announces major overhaul of income-based repayment and student loan forgiveness programs

Will Biden cancel student loan debt? We may know soon

Biden Student Loan Forgiveness Review: Should You Take Action Now To Write Off Student Debt Later?

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