The United States Supreme Court has refused to hear a case raising questions about whether student loans can be discharged in bankruptcy, leaving a tough student loan bankruptcy standard in place for the time being.
The case, Conti v. Arrowood Indemnity Co., involved a borrower who was trying to discharge her private student loans in bankruptcy. Conti, the borrower, had attended the University of Michigan and took out private student loans from Citibank totaling over $76,000. The loan applications identified the debt as educational debt for “students attending 4-year colleges and universities,” and the promissory notes mandated that “the proceeds of this loan are 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 attendance.
In 2017, Conti filed for bankruptcy and listed the Citibank loans as dischargeable. But the bankruptcy code treats student loans very differently from most other forms of consumer debt, such as credit cards or past due bills. To discharge student loans in bankruptcy, borrowers must generally prove that they have an “undue hardship,” which is a difficult standard to meet. These restrictions initially only applied to federal student loans, but were subsequently expanded to cover private student loans (like Conti’s) following the passage of a 2005 bankruptcy reform bill.
The “undue hardship” standard is not well-defined in statute, so bankruptcy courts have established several tests, which vary by circuit, to determine whether a borrower can meet the standard. But to even try to show that they meet the “undue hardship” standard, student loan borrowers must initiate an “adversary proceeding,” which is essentially a lawsuit within the bankruptcy case that is brought against the applicable lenders. The adversary proceeding can be a long and invasive process for borrowers, and can get quite expensive for those who retain a private attorney. Student loan lenders may also have significantly more resources than borrowers, which can give them an advantage. As a result, many student loan borrowers are unsuccessful in proving undue hardship, and many others don’t even try.
Conti filed an adversary proceeding not to show that she met the “undue hardship” standard for student loans, however. Instead, she filed an adversary proceeding to try to show that the private student loans were not “qualified education loans” within the meaning of the bankruptcy code due to questions and disputes about the exact cost of attendance, her status as a student, and her other applicable financial aid. If successful, this strategy would have allowed her to potentially bypass the “undue hardship” standard altogether.
However, the bankruptcy court rejected her arguments, and a federal district court and the federal Sixth Circuit Court of Appeals affirmed. The Sixth Circuit concluded that the plain language of the loan application and promissory notes clearly showed that these were student loans and, thus, were not dischargeable in bankruptcy, absent a showing of undue hardship.
Conti appealed to the U.S. Supreme Court. But by rejecting the case today, the Court has effectively kept the tough bankruptcy code’s treatment of student loans in place.
Ultimately, when it comes to student loans and bankruptcy, it may take action by Congress for there to be real reform. Earlier this year, Senate Democrats unveiled the Medical Bankruptcy Fairness Act of 2021, which would allow student loan borrowers to discharge their 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 loan debt differently.
Congressional Democrats have proposed similar bills in the past, but those proposals went nowhere in the Republican-controlled Senate. Now, with Democrats holding narrow majorities in both chambers of Congress, bankruptcy reform has a better chance of passing. But, it is unclear if student loan bankruptcy reform would garner sufficient bipartisan support to overcome a potential Republican filibuster.
