A California woman with more than $350,000 in student debt served as her own lawyer in personal bankruptcy and saw 98{ac23b82de22bd478cde2a3afa9e55fd5f696f5668b46466ac4c8be2ee1b69550} of her loans discharged in the latest case in a growing trend.

Court filings show that the Education Department (ED) and the Los Angeles-based woman, Mis Loe, agreed on August 30 that Loe would pay $7,200 of her $356,637.82 in outstanding loans (at a fixed monthly rate of $60 for 10 years or until October 1, 2031).

Once Loe completes the $7,200 payment by October 2031, according to the agreement, she “shall be discharged of the remaining balance of the student loan debt, pursuant to her Chapter 7 discharge order.”

The case highlights the growing number of student loan debtors obtaining relief through personal bankruptcy and further dispels the notion that student loans are exempt from court-ordered discharge. 

Furthermore, the case shows that regular people — especially those in extraordinary personal circumstances — are able to win for student debt discharges without a lawyer.

“It’s not a straightforward, easy process… [but] the data has been consistent over the past decade — folks with attorneys don’t do any better than individuals who don’t have attorneys in this specific context of litigating the adversary proceeding,” Jason Iuliano, associate professor at the University of Utah and an expert on student loan bankruptcy law, told Yahoo Finance. “They both tend to get about the same level of favorable outcomes. And I can’t think of another area of law where that’s true, where having an attorney makes you worse off.”

The struggle with diabetes and student loans

Originally from Olympia, Washington, Loe began her undergraduate degree at the University of Washington in 1992.

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Within a year, she became ill was diagnosed with Type 1 Insulin Dependent Diabetes. Her struggle to find a proper treatment plan led her to be in and out of hospitals for multiple years, causing her to fall behind on her bachelor’s degree.

“I got a lot of zero-point-zeros on my transcript because I didn’t know how to report medical illnesses to the University of Washington,” Loe told Yahoo Finance. “And that ruined my grades. I was embarrassed. I was embarrassed to be sick.”

In 1997, Loe re-enrolled in school, but she attended sporadically because she worked at a coffee shop 30-60 hours a week so that she could qualify for health insurance. Loe’s health issues worsened over the years as she was diagnosed with a brain tumor, and had to stop school again in 2005 to focus on her health. She eventually re-enrolled again in 2012 and earned her bachelor’s degree in cinema studies in 2013.

Loe then moved to Los Angeles to find work in the film and television industry while also applying for graduate school at the American Film Institute Conservatory. She found part-time work at coffee shops until she earned a master’s degree in film and television in December 2018.

After her education, she made ends meet while working entry-level temp jobs on film and TV sets by driving for Postmates and and asking for more hours at the coffee shop.

“I did all that just so I could barely pay my monthly bills each month,” said Loe, who had also accumulated about $40,000 in credit card debt. “I always had my expenses down to a minimum, but it’s LA.”

Her adversary proceeding — a crucial step for student debtors looking for financial relief through personal bankruptcy — stated her thinking at the time: “She thought if she could get off the repetitive cycle of taking out PayDay loans and depending on overdraft protection to make ends meet that she could reduce her monthly expenses and allow her to take on an internship which could maybe lead to a job.”

Mis Loe Initial Complaint by Aarthi

The coronavirus pandemic in early 2020 delivered a crushing blow to Loe’s finances: She lost her coffee shop job in March 2020, stopped driving for Postmates “due to health concerns and her compromised immune system,” according to the complaint, and saw film work dry up.

In May 2020, Loe filed a bankruptcy petition using free software tools provided by Upsolve, a non-profit startup that helps low-income individuals file for bankruptcy, and served as her own lawyer in a process known as “pro se.” Months later, she filed an adversary proceeding to discharge her student loans as part of the personal bankruptcy.

In the complaint, Loe listed all the payments she made to student loan servicer Nelnet since 2014, all of the dates when she had been in forbearance, deferred payments, and when she had been on an income-based repayment plan in 2014, 2016, and 2019. According to court filings, the “highest amount she has ever earned [in one year] was $33,445 in 2011.”

“I made so many mistakes, it’s ridiculous, God knows I tried,” Loe said, recalling the process of preparing her papers. “The law is like its own language. And that to me was the most frustrating part.”

‘Tragedy of the American legal system’

Very few Americans opt to file for bankruptcy for their student loan debt for three primary reasons, according to Upsolve Co-Founder and CEO Rohan Pavuluri.

First, “they don’t know that they can discharge student loans in bankruptcy — there’s this narrative that’s been perpetuated by the media and by lawyers that it is impossible to discharge your student loans in bankruptcy, no matter what,” Pavuluri told Yahoo Finance. “The second issue is that it’s extremely complicated.” 

The third reason is that on top of preparing an adversary proceeding, which is a detailed lawsuit, the debtor also takes on the federal government — “and that is such a complicated and intimidating thing to do,” Pavuluri noted.

Furthermore, although Loe was able to navigate through the system by herself, fees can add up for debtors going in with a lawyer.

“The cruel irony is that the folks who are a good fit for discharging their student loans in bankruptcy or folks who face an undue hardship … those are the people who are least likely to be able to afford legal fees,” Pavuluri said. “This is the sort of tragedy of the American legal system that … so many rights aren’t accessible to people unless they can afford legal fees.”

In Loe’s case, ED decided to settle it before the matter went before the judge.

“In order to resolve this matter without the need for further litigation,” a court filing stated, “the Parties agree that the Plaintiff shall provide partial repayment of the Student Loans and that dismissal of the Adversary Proceeding with prejudice is appropriate.”

Iuliano noted that the ruling “was a very good outcome for [Loe], who had well over $350,000 in student loan debt knocked down to just above $7,000.” He added that Loe, serving as her own lawyer, compiled a “very, very extensive complaint. She clearly put a ton of time and effort into drawing this up and building her case and ultimately a very, very good outcome for her.”

In an email to Pavuluri on September 8, viewed by Yahoo Finance, Loe wrote: “I’m average-smart, but being smart had nothing to do [with] winning. It was simply seeing it through, following the rules and participating.”

Matthew Bruckner, a bankruptcy law professor at Howard University, told Yahoo Finance that Loe could’ve actually pushed harder for a full discharge given how serious her condition was.

“I’m upset with my government that we are taking this woman and putting her through the meat grinder when she seems by any objective measure to satisfy these very strict tests which are much stricter than the language should indicate,” Bruckner said.

Generally, in personal bankruptcy cases involving student debt, the judge applies the Brunner test — a three-pronged test applied to student loan borrowers who file adversary proceedings to discharge educational debt — to determine if specific student loans caused a borrower to suffer undue hardship.

“The Department of Education should define undue hardship in a way that is much more debtor-friendly so that we don’t ask people for themselves through the wringer like this, and the department stops objecting to discharge of obviously un-repayable debt,” Bruckner said.

The practice of pushing student loan debtors into income-based repayment

When student borrowers go to bankruptcy court seeking debt relief, courts will often reject requests for a discharge and place the borrower on an income-driven repayment (IDR) plan, or in Loe’s case, a fixed payment plan for a number of years before debts are settled.

But the outcome isn’t ideal for the rest of student debtors aspiring to erase their debt via bankruptcy, Iuliano said.

Based on Iuliano’s analysis of past cases, when debtors reach a situation where it looks like a judge may discharge their student loans, the creditor — such as ED or a student loan servicer — ends up settling to avoid precedent.

And crucially, those settlements won’t have any effect on the way future cases play out in court because settling the case means that the order isn’t binding.

Consequently, according to Iuliano, ED’s move to settle the case rather than reach a judicial decision was regrettable.

“Here, there’s a very good case from the debtors… who built a very persuasive case to receive a discharge, and the Department of Education runs her through the gauntlet, makes her litigate the case up until the very end, and then at the last moment” offers a settlement to “make the case go away,” Iuliano explained.

“Implicit in this action,” he stressed, “is that the Department of Education is concerned that the judge will write a… scathing opinion for them [that] the loan is dischargeable … it’s almost like they took the case away … it’s not binding precedent to other judges and it’s not something attorneys can cite to.”

Furthermore, the promise of forgiveness after 20 years of on-time repayment hasn’t really panned out: The National Consumer Law Center’s Persis Yu, using a public records request to the ED, found that less than 20 IDR participants in total were slated to get forgiveness by the end of 2019.

Additionally, data from a FOIA request obtained by the Student Borrower Protection Center revealed that borrowers with PHEAA, one of the major student loan servicers, projected dismal forgiveness rates for the next five years. For instance, only four borrowers are on track for student loan forgiveness through IDR in 2025. ED did not respond to requests for comment.

In any case, more student debt being discharged through personal bankruptcy proceedings is challenging a fundamental part of the U.S. student loan system.

“It really sucks to be poor,” Loe said, “but places like Upsolve make you feel like you have a chance.”

Loe made the first $60 payment of her new payment plan on September 21.

Aarthi is a reporter for Yahoo Finance. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami.

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