The Biden administration’s new approach to student loan bankruptcy is revolutionizing debt relief, according to legal experts.
“We have gotten forgiveness for a number of clients under the new bankruptcy changes,” said Malissa Giles, a consumer bankruptcy lawyer in Virginia. “The discharge is life changing for them and their families.”
In autumn 2022, the U.S. Department of Education and the U.S. Department of Justice unveiled revised bankruptcy guidelines, aiming to streamline the process for student loan borrowers. Previously, it was nearly impossible for most individuals to shed their education debt through bankruptcy proceedings.
Historically, policymakers had imposed additional hurdles for discharging student loans in bankruptcy, fearing that students might accumulate debt for education and then attempt to evade repayment. Borrowers had to demonstrate “undue hardship” or “certainty of hopelessness,” with government attorneys contesting the majority of requests.
The recent wave of student loan debt forgiveness aligns with prior legislative efforts, notes Bharat Ramamurti.
Under the Biden administration’s updated policy, student loans are now treated more similarly to other forms of debt in bankruptcy court. Borrowers can submit a detailed 15-page form outlining their financial hardships and presenting their case for relief.
“While the government used to aggressively oppose discharge in almost every case, there is now a policy to concur when the borrower demonstrates financial need and a history of sincere efforts to repay the loans,” explained Latife Neu, a bankruptcy attorney in Seattle.
“I’ve assisted several individuals in leveraging the expanded opportunity to discharge their student loans in bankruptcy,” Neu remarked.
Student loan borrowers facing extreme financial hardship may find solace in the more lenient bankruptcy rules, yet experts caution against this route for most individuals.
“Depending on the type of bankruptcy you pursue, that information can stay on your credit report for up to 10 years, making it a challenge to buy a house, apply for other types of loans, and even to rent an apartment,” explains Mark Kantrowitz, a higher education expert.
Kantrowitz emphasizes that borrowers should explore alternative relief options instead. Federal student loan borrowers have access to various avenues for reducing their debt burden, such as income-based plans offering $0 monthly payments, as well as deferments for economic hardship and unemployment.
Additionally, there are loan relief programs tailored for borrowers with disabilities and those battling cancer.
Following the Supreme Court’s dismissal of President Joe Biden’s proposal to cancel up to $20,000 in student debt, the president initiated a new endeavor to forgive education debt, particularly targeting individuals facing financial hardship.
Given this development, Kantrowitz advises borrowers to wait and observe what relief measures the government may implement before considering bankruptcy. The Biden administration could unveil its revised forgiveness package as early as November.
For struggling borrowers still contemplating bankruptcy, Kantrowitz suggests consulting with a nonprofit credit counselor before proceeding.
