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Biden’s Unconstitutional “Bankruptcy Abuse” Act Makes Peons of Student Debtors

The law prohibits education loans from being discharged through bankruptcy. It should be repealed to provide relief.

Organizers march from the Supreme Court to the White House after the nation's high court stuck down President Biden's student debt relief program on Friday, June 30, 2023, in Washington, D.C.

The Supreme Court recently blocked the Biden administration’s plan to cancel $430 billion in student loan debt. The decision disappointed 43 million borrowers owing $1.6 trillion in student debt. Regardless, the failure of the Biden plan misdirects us from the root problem: It’s not that student loan borrowers need debt relief; it’s that they merit a debt discharge.

Every honest, unfortunate debtor has the constitutional right to a fresh start. That is, the right to discharge their debts, if overwhelming, through bankruptcy proceedings. But student loan borrowers were condemned to “involuntary servitude” when Joe Biden, while still a senator, led Congress to enact the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005.

BAPCPA prohibits education loans from being discharged through bankruptcy, unless the borrower can show “undue hardship” in paying them back. But “undue hardship” is an arbitrary standard that violates the 13th Amendment.

The 13th Amendment prohibits slavery and involuntary servitude. The former refers to chattel slavery and the selling of debtors into servitude to satisfy debts. The latter means that economic relationships must be voluntary, such as employee-employer or debtor-creditor. More specifically, it means no peonage.

Black’s Law Dictionary defines peon as “a debtor held by his creditor in a qualified servitude to work out the debt; a serf.” In the 1905 case Clyatt v. United States, the Supreme Court defined peonage “as a status or condition of compulsory service, based upon the indebtedness of the peon to the master. The basal fact is indebtedness.” By these definitions, student loan borrowers whom Congress has trapped in debt are, in fact, peons.

BAPCPA prevents student loan borrowers from discharging their debt through bankruptcy unless they can meet the “undue hardship” standard. Most courts interpret “undue hardship” to mean that the borrower must prove that they cannot maintain a minimum standard of living if they repay their loans. Very few borrowers can meet this draconian standard. Courts enter those who can’t into a “wage earner’s plan,” which enables persons with a regular income to restructure payment of their debt over time. Such a plan euphemizes the “qualified servitude” that defines the peon.

BAPCPA thus defeats the 13th Amendment’s positive purpose — to empower United States citizens to enter the “free market” as bona fide merchants. The 13th Amendment stands for the right of every U.S. person, of their own free will, to buy and sell goods and services.

This public policy against “involuntary servitude” explains why every student loan debtor has the right to a fresh start through a discharge of debts. But they are prevented from discharging their debts except through payment plans. Congress has made them peons. Therefore, BAPCPA is a “mass peonage statute” that subverts the freedom of the U.S. people.

Moreover, BAPCPA further widens the racial wealth gap, which refers to the fact that the typical white U.S. family has 10 times as much wealth as its Black counterpart due to the legacy of slavery and, more recently, to federally sanctioned segregation policies such as redlining.

The typical Black family lacks wealth and thus relies more on debt to attend college than white households do. In 2016 the Brookings Institute reported that Black students who graduated from college in 2008 owe $7,400 more, on average, than their white peers do. Furthermore, Black students owe an average of $52,726 four years after graduation — compared to $28,006 for the average white student. Usurious interest rates as high as 28 percent contribute to this huge discrepancy. These facts support the old adage: “When white folks catch a cold, Black folks get pneumonia.”

A repeal of BAPCPA would narrow the racial wealth gap between white and Black people as well as other marginalized communities. Allowing student loan borrowers a fresh start would cure many of the cold, a few of pneumonia. Congress should use its bankruptcy power to save millions of borrowers from peonage.

Properly understood, Congress’s 13th Amendment power to pass “appropriate legislation” supplements its Article I bankruptcy power. Joseph Simmons’s 2021 law review article, “Reconstructing the Bankruptcy Power: An Originalist Approach,” explains how the 13th Amendment established the merchant-citizen paradigm which “reconstructed” the bankruptcy power. He shows how bankruptcy law evolved into the right to a fresh start.

Before the Civil War, “bankruptcy” denoted merchant fraud. Only creditors could initiate bankruptcy proceedings against merchants who were insolvent debtors. Bankruptcy was strictly involuntary. Then the Bankruptcy Act of 1841 became the first law to allow for voluntary as well as involuntary bankruptcy. Insolvent debtors could declare bankruptcy too. But Congress repealed the controversial law only two years later.

Notwithstanding the Act of 1841, bankruptcy law was a creditor remedy against merchant debtors before the Civil War. The 13th Amendment made it the fundamental policy of federal bankruptcy law to grant the honest debtor a fresh start. Enter the Bankruptcy Act of 1867.

The Act of 1867 allowed voluntary bankruptcy proceedings like the Act of 1841 had done. Congress recognized that the insolvent debtor was vulnerable to “involuntary servitude” if the remedies available to creditors weren’t kept within reasonable bounds. Simmons insists on a twofold purpose of bankruptcy law: to prevent economic oppression by allowing bankruptcy discharges and to protect the right to a fresh start.

Elizabeth Lee Thompson reports in The Reconstruction of Southern Debtors, her book on the Bankruptcy Act of 1867, that congressmen arguing over the act repeatedly compared emancipation from slavery to freedom from debt bondage. Congressmen who favored the legislation tended to see the Southern white debtor as a potential “debt slave” that needed protecting from “involuntary servitude.”

According to Thompson, Southerners lost two-thirds of the value of their property from the war. Half their loss was the result of the emancipation of 4million formerly enslaved persons who, in 1860, had been worth almost $4 billion. The South was in economic shambles.

Thompson describes the Act of 1867 as a “sort of jubilee” for the many southern debtors — white men almost all — who discharged their debts. She quotes an American Bar Association reporter who said, in 1881, that Southerners viewed the act as a temporary “sponge, to wipe off a vast amount of hopeless debts, and give everybody a clean slate with which to start fresh.” The act had already served its purpose when repealed in 1878.

The South had committed treason. Yet Congress protected former Confederates’ right to a fresh start. I don’t begrudge them their “sort of jubilee.” But they never did have to prove “undue hardship” to discharge their debts through bankruptcy. Congress didn’t treat former slavers like peons — nor should Congress continue to treat millions of student loan borrowers as such.

Congress must repeal BAPCPA. A “sort of jubilee” for 43 million student loan borrowers is long overdue.

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