The U.S. Departments of Justice and Education "haven't given an inch" in court as they fight cancer patient Heather Smart's student loan discharge request, Smart's lawyer told Law360.

In September 2020, Smart, a Texas resident who owes $95,180 in federal student loans, applied to discharge the debt through a special adversarial proceeding in her Chapter 7 bankruptcy filing. By December of that year, the U.S. government and student loan creditor Navient Solutions Inc. were taking Smart to court while she was in treatment for several forms of cancer, her attorney Brian Roan said.

When the federal freeze on student loan repayments is lifted in August, Smart will owe $1,017 a month, according to her bankruptcy filing. Her progressive and recurring battle with cancer prevents Smart from working full-time, and her unemployment benefits ran out over a year ago. She relies on the kindness of family and friends and her part-time work as a CPR instructor — a job completely unrelated to her accounting degree from Eastern New Mexico University — to pay her medical bills, which have already begun mounting again after her bankruptcy filing.

But the federal government is claiming that because Smart could one day recover from her cancer, she would be capable of paying the loans down the line.

"It was mortifying to me to even go through bankruptcy," Smart told Law360. "The whole thing, it's just kind of a punch in the gut."

With the trial still set to continue in June, Roan, a lawyer at Ciment Law Firm PLLC in Houston, said he has been disappointed by the opposition Smart has faced from the government.

"They're not pulling out all the tricks and nasty tactics to really aggressively fight a lawsuit. They're just going through the regular motions," Roan said. "But the fact that they're fighting it at all is what I'm still a little disheartened by."

But as Biden administration Secretary of Education Miguel Cardona begins tackling the trillion dollars Americans owe in student debt, and as the deferment of student loan payments continues to be extended, cases like Smart's are getting more attention.

This year, the Education Department dropped two appeals of student loan bankruptcy discharges, although the department has over 60 cases still open in bankruptcy courts across the country, PACER filings show.

Cardona said in March that the department would be "working to change its policies so that bankruptcy is an option for those struggling with student debt." Cardona also said that the department had asked the DOJ to pause any active bankruptcy litigation on the student borrower's request, to ensure that everyone can benefit from potential policy changes.

The Department of Education told Law360 last week that the department is still working to "to ensure that the government does not appeal bankruptcy cases where the borrower has proven an undue hardship," so that borrowers "get a fair shot" at bankruptcy discharges. 

"Borrowers in financial distress should have the ability to discharge their student loans through bankruptcy, but too often the process leads to unfair results," a department spokesperson said. "While the student loan payment pause remains in effect, any borrower in an adversary bankruptcy proceeding can request and receive a stay on their proceedings."

But a stay doesn't resolve the discharge request. Roan says that Smart's case is continuing as usual, which he is a bit baffled by.

"My understanding is that the administration's stance is, 'Let's get student loan relief going,'" Roan said. "This is a great place to do it, because if there's ever a candidate to qualify for a hardship dismissal, well, I think Ms. Smart is kind of the poster child for that."

No Way Out

Borrowers who want to discharge their student debt have to meet a difficult standard of "undue hardship" — a term that Section 523(a)(8) of the Bankruptcy Code doesn't define. But courts have adopted something called the "Brunner test," which requires debtors to show that they have made a good faith effort to make payments on the debt; that they would not be able to maintain a minimal standard of living if forced to carry the debt; and that financial difficulties are likely to persist for the foreseeable future.

These prongs, and the way the federal government interprets them, make it almost impossible to prove undue hardship, Dan Zibel, vice president and chief counsel of the nonprofit advocacy organization Student Defense, told Law360.

"The courts, over time, have developed ways of looking at it where a student loan borrower really has to prove in many jurisdictions that they have a certainty of hopelessness," Zibel said. "And these are folks who oftentimes can't afford a lawyer. So the bar is set pretty high. I think that's one of the reasons why a lot of people actually think you can't get a student loan discharge through bankruptcy."

Some advocates gleaned hope from a January ruling in which a Delaware bankruptcy judge eliminated 35-year-old Ryan K. Wolfson's near $100,000 student loan debt. In her 29-page opinion, U.S. Bankruptcy Judge Laurie Selber Silverstein rejected "onerous" and "overly strict" standards that have evolved for discharging student debt as "unmoored from the original test and the plain language of 'undue burden.'"

Just as in Smart's case, the federal government argued against Wolfson, who has epilepsy and suffered a car accident, saying he doesn't meet "undue hardship" claims because he could participate in a $0 a month income-based repayment plan until his income rises, and therefore he could go on to pay the debt.

Smart, who has been delaying going before a judge until she has a better understanding of how long her treatments will take, has been dealing with similar claims from the prosecutor on her case, Chad Wesley Cowan of the U.S. Attorney's Office for the Southern District of Texas. Cowan argued on behalf of the federal government that Smart couldn't satisfy the "undue hardship" requirement because if her health improves, she has a college degree and should have no trouble finding employment to begin paying her loans back.

The U.S. attorney's office declined to comment.

Smart has more than one form of cancer, made more difficult to treat by a rare blood disease. She told the court that if she does make it to remission, she will likely be permanently disabled or the cancer will come back at some point in her lifetime.

"Even if she does fully recover, shouldn't she be entitled to some relief?" Roan said. "At some point, they should just say, 'Wow, OK, you've got this bevy of medical issues going on. In the grand scheme of things, we're trillions of dollars deep in federal student loans that are out there. Your tiny little drop in the bucket is so irrelevant to our big picture.'"

The Department of Education did grant Smart a cancer treatment deferment from paying her student loans until October 2023. But Roan said the deferment "isn't as big a deal as it seems," especially because student loans are already deferred for everyone, and there is no telling if Smart will be done with her treatment in a year and a half.

"It's just kicking the can," Roan said. "It doesn't really give her any final resolution. Now she has to think, 'OK, well, I'm gonna go try and survive. And maybe a year and a half from now, I can go back to work and support myself. And then I've got to deal with my student loans again.'"

Even without monthly payments, the debt continues to grow and leave borrowers financially handicapped, Zibel pointed out.

"It is a ballooning debt on your credit report, so it's going to make it harder for you to really have that fresh start that you're supposed to get in bankruptcy," Zibel said. "You're at a vulnerable time in life. You're looking to start your financial future over again, and this is hanging out there for you. So in many ways, it's totally antithetical to the notion of bankruptcy."

A Private Battle Made Public

This is the second time Smart has had cancer. The first was in 2002, when she was just a year into college. It would take her a decade to graduate, juggling school with oncology appointments, chemo, radiation and multiple surgeries. Two decades after her initial diagnosis, she has beaten cancer once and then gotten it again, given birth to a son, earned her bachelor's degree and racked up lots of medical and educational debt.

When she filed for bankruptcy in 2020, she thought her health was improving and that it was the right time to begin her financial life anew. But soon after filing, she got sicker and suddenly had more doctors and specialists than she had before. The blank slate bankruptcy provides has already been wiped away for Smart as her medical debt again begins mounting.

So there is a part of her that is quite amused by the Department of Education's optimism, claiming that when, not if, she gets better, she will be able to pay off her debt.

"I wish that I could have their silver lining that everything's gonna be OK," said Smart, whose blood disorder and multiple forms of cancer put her in the 86th percentile to get cancer again if she does go into remission. "We can't foresee the future like apparently the U.S. Department of Education can."

Smart would love it if no one knew anything about her medical records, her financial woes, the ways in which her body is changing to fight off multiple forms of illness. The idea that she must go in front of people in court, knowing her hair is falling out from radiation treatment, and try to explain why she is deserving of a second chance is utterly dehumanizing, she said.

"It's embarrassing for me," Smart said. "I'm basically putting my personal, medical, private life out there for every freaking person to see. I don't think they understand what it does to an individual emotionally, spiritually, physically."

Fresh Starts

Roan has been working as a civil litigation attorney for Ciment Law since 2020. He says most of his Chapter 7 clients have student loans, but he's not likely to file an adversarial proceeding for any of them.

"They can get rid of all their private debt, all their unsecured debt with banks and credit unions, and whoever else that isn't the government," Roan said. "But when it comes to the federal student loans, we don't even bother because we know it's just not going to happen. They're gonna fight it, and they're gonna win.

Smart is the exception because of how "clearly deserving" she is, but the reality is that most people who apply for bankruptcy are dealing with unexpected circumstances, whether it's a medical emergency, a pandemic or a major economic recession, Roan said. Bankruptcy is a mechanism for fresh starts, and one that comes at a hefty price.

"Nobody does it just flippantly," he said. "It's not free, either. I think our Chapter 7 starts at 1,500 bucks."

But since Congress passed a 2005 bankruptcy bill stripping student loans of bankruptcy protections, aside from the undue hardship clause, the federal government has been stingy with offering these fresh starts to student borrowers. President Joe Biden ardently backed the bill at the time.

"You can get out from any other lender, but not the richest entity on the planet, the United States federal government," Roan said. "The cognitive dissonance there is just disturbing to me. It's backwards."

Zibel says it makes little sense to treat student loans differently from almost every other kind of debt, particularly because there's a low chance that the federal government will recover all of the debt from most borrowers, especially those who are the most vulnerable. According to the Federal Reserve Bank of New York, roughly 20% of the outstanding dollars of student loans are delinquent and only 60% of student loans are in active repayment.

"The department doesn't need to be pushing the law in a harder direction for borrowers," Zibel said.

Changing the Framework

While restoring bankruptcy protections to student loans would take an act of Congress, it would be quite easy for the DOE and the DOJ to stop automatically opposing these discharge requests, Zibel said.

"I think it could happen incredibly quickly," he said. "We have proposed that the department take a presumptive, no contest position."

The framework that makes the most economic sense, professor Pamela Foohey of Yeshiva University's Benjamin N. Cardozo School of Law told Law360, is for the Education Department to decline to oppose a student loan discharge request, and if a department employee flags a case as being faulty or problematic, it can request to oppose the filing.

Adopting this policy will likely save the government money, Foohey says. It costs the DOJ anywhere from $1,000 to $7,000 to oppose a bankruptcy case. Given that many who file for bankruptcy have already been in default on their loans for several years and are unlikely to pay them back in the near future, the government is likely to spend more trying to collect these loans than it will actually recover.

"When we think about opposing bankrupt students, borrowers, it's costly for the Department of Education, it's costly for the Department of Justice," Zibel said. "It fuels that financial turmoil, and it really is not what the department should be doing as sort of a knee-jerk reaction to a bankruptcy."

The Education Department doesn't need to take further precautions with these cases because the courts themselves are already tasked with evaluating the discharge request and deciding whether a borrower meets the undue hardship standard, Foohey said.

"The debtor still has to convince the court they are entitled to an undue hardship finding, and if they can't show that, it really doesn't matter as much what the Department of Education is going to say, because it's within the court's discretion," she said.

Steps Forward

At the end of March, Sen. Dick Durbin, D-Ill., chair of the Senate Judiciary Committee, wrote a letter to Cardona and Attorney General Merrick Garland, encouraging them to take immediate action on student loan bankruptcy discharges.

"Over the past several decades, Congress and the courts have together nearly eliminated bankruptcy as a viable path towards financial recovery for most Americans struggling with student loan debt," Durbin said.

Durbin emphasized that a bipartisan effort is underway in Congress to reform the Bankruptcy Code's treatment of student loans, but said changes to administrative policies within the Education Department are also necessary and long overdue. He said the department should update its guidance, making it simpler and fairer, identifying situations of disability or financial adversity where the borrower should be able to qualify and not requiring formal litigation discovery, which costs both parties time and money.

Zibel says he finds all of this promising.

"You've seen Senate hearings on this. You've seen legislation. You've seen Senator [Chuck] Schumer be pretty outspoken on this, among others," he said. "It all feeds into the department recognizing that there is a need to fix this, and I'm hopeful that we see something from them pretty soon."

Randi Weingarten, president of the American Federation of Teachers, told Law360 that as the Department of Education is already reforming other aspects of loan forgiveness, including putting 100,000 teachers, nurses, firefighters and public servants on track for over $6 billion in relief, it might as well reform its bankruptcy standards as well.

"It should continue on this path, rather than needlessly fighting borrowers in court," Weingarten said.

Foohey, however, said that an emphasis on student debt forgiveness could actually overshadow the focus on bankruptcy. There have been several reports that Biden has been weighing plans to move forward with a loan forgiveness plan, which could expunge at least $10,000 per borrower. Legal experts like the Legal Services Center of Harvard Law School, have determined that broad or categorical debt cancellation exercised by the education secretary would be lawful and permissible.

If there is a possibility that their debt will be forgiven, fewer people will be harping on bankruptcy policies. Of course, many borrowers who declare bankruptcy have more than $10,000 in student loans, although the median defaulter owes slightly over $9,600, and based on the median income of those who file for bankruptcy every year, which is $42,444 per year, most bankruptcy applicants owe less than 50% of their income, so less than $20,000, according to data from the U.S. Courts from 2019.

Ultimately, though, forgiveness should be prioritized over discharging loans, Foohey said, especially when it costs a lot of money to declare bankruptcy and the practice carries negative stigma.

"There's a lot of stuff going around about what President Biden is going to do with student loan forgiveness, and sometimes people respond to that, 'Well, why don't you just reform the Bankruptcy Code so that student loans are dischargeable?" Foohey said. "And my response to that is, 'Well, that is extremely expensive. It is not forgiveness. It's going to leave the most vulnerable behind.'"

Smart said her son will soon be headed to college, and she has warned him to avoid taking out student loans at all costs.

"I told him, 'Please, God, don't get a student loan. They will do nothing but harm you the rest of your life,'" she said. "Our system is just broken."

--Editing by Jill Coffey.

Update: This story has been updated with comment from Smart and from the Department of Education.

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