Suing the Government is Your Best Move Against Student Loan Garnishments

Federal student loan garnishment is back with a vengeance, but many borrowers don’t realize that filing an adversary proceeding may be the most effective way to force a permanent settlement and reduce your student loan balance.

For decades, the standard advice on student loans in bankruptcy has been “Don’t bother.” There was a time when I told clients, “Unless you are unemployed and homeless, it’s not going to happen.” I took it a step further by telling clients that unless they live in a “cardboard box,” a phrase that ironically has been used by federal judges to describe the absurdity of the “undue hardship” standards, the chances of success were highly unlikely.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Key Takeaways: Navigating Student Loan Bankruptcy and the Adversary Process

• Stopping Wage Garnishments: Federal wage garnishment, up to 15% of disposable income for defaulted loans, has resumed. Filing a bankruptcy petition triggers the Automatic Stay, stopping wage garnishments and providing the breathing room needed to file an adversary proceeding.
• The “Settlement Gap” Works to Your Advantage: Success rates in student loan discharge are artificially low because the Department of Justice often settles its weakest cases. These settlements don’t appear in the “denied” statistics, meaning relief is more attainable than the public believes.
• The Adversary Proceeding is a Negotiation Tool: The adversary proceeding (AP) works as a formal request for the government to review your hardship. Under current DOJ guidance, the government is encouraged to stipulate to a discharge or reduction in your loan balance rather than litigate.
• 98% Success Rate for Recommended Cases: Recent data confirms that when the government recommends discharge after reviewing a borrower’s finances, the bankruptcy courts approve the request in 98% of cases.

The Myth of Discharging Student Loans and Bankruptcy

The reason most people, including bankruptcy attorneys, believe that student loan discharge is impossible is due to a massive selection bias in cases reported. But as the federal government ramps up wage garnishments, student loan borrowers face losing 15% of their income. What can be done? File an Adversary Proceeding (AP).

In a landmark law review article, Professor Jason Iuliano identified what he calls the “Student Loan Bankruptcy Gap.” He found that the statistics are skewed because the Department of Justice (DOJ) and creditors engage in strategic settlements.

When the government realizes a debtor has a strong case and agrees there is an  “undue hardship,” the DOJ often settles. These cases result in stipulated judgments/agreements or voluntary dismissals. Because they don’t go to trial, they don’t end up in the statistics. The public only sees the “losing” cases that the government felt confident enough to litigate.

As a result, you aren’t seeing the thousands of people who successfully settled their student loans by using bankruptcy as a tool.

The “Nothing to Lose” Approach

With garnishments on student loans resuming next month, the approach has changed. If the government is already taking 15% of your wages, you are already in the “worst-case scenario.” This is similar to debtors who have a judgment against them, and I ask them why would the creditor negotiate at this point?

If the creditor is already receiving 15% to 25% on wage garnishment, they certainly aren’t going to accept 14% or any lesser amount. So, unless more is offered, which wouldn’t make any sense, then the only options left are a lump sum, which is still unlikely, or file for bankruptcy to wipe out that debt. But filing bankruptcy alone is not enough to wipe out student loan debt. There’s the extra required step of also filing an adversary proceeding.

I often explain to my students that an adversary proceeding is essentially a lawsuit within a bankruptcy case. It is a separate, litigated case that runs alongside your bankruptcy. The adversary process is used to contest the dischargeabilty of debt, in this case, student loans.

Filing an Adversary Proceeding as a Step Towards Settlement

Filing an adversary proceeding is no longer an aggressive risk likely to result in failure, but a formal step towards settlement. Under the 2022 DOJ Guidance, the federal government is now instructed to look for reasons to agree to a stipulation or settlement rather than fight you.

Why You Can’t Do This Alone. The Need for an Experienced Bankruptcy Attorney

While the process is more favorable, that doesn’t mean “automatic.” The DOJ’s willingness to settle depends on the Attestation Form, a complex document where you compare your finances with IRS National Standards. This is similar to the Means Test in Chapter 7 bankruptcy.

An experienced bankruptcy attorney doesn’t just “argue” your case, but also analyzes and audits your finances to prove you meet the three requirements of the subjective Brunner Test:

1. Present Inability: You can’t maintain a minimal standard of living today.

2. Future Inability: Your financial struggles are likely to persist.

3. Good Faith: You’ve tried to manage the debt through other programs or consolidation.

The Professor’s Take

Don’t let the statistics scare you or guide yourself by the “word on the street” (social media). It is to the federal government’s advantage to settle a weak case rather than lose a trial and create a new precedent that will open the floodgates to millions of student loan borrowers.

The Adversary Process is a strong tool to force the government to the negotiation table that could potentially save you tens of thousands of dollars, including avoiding a student loan wage garnishment.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link. You can also listen to my podcast on Spotify.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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