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Increase in Student Loan Borrowers Successfully Discharging Debt through Bankruptcy

A rising number of student loan borrowers facing severe financial hardship are now able to discharge their debts through bankruptcy, thanks to recent changes made by the Biden administration.

According to the Department of Education, within the first 10 months since the implementation of a new bankruptcy process in November of last year, 99% of borrowers utilizing this method had some of their student loan debt discharged.

Although only a small number of 632 individuals have utilized this new procedure so far, education officials anticipate a significant increase as more legal professionals, both within and outside the government, become familiar with the updated guidelines.

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Unlike other types of debt, student loan debt has historically been treated differently by bankruptcy courts due to Congress’ 1970s legislation aimed at preventing abuse by affluent and highly educated professionals. Borrowers seeking to have their student loans discharged were previously required to sue the government, proving that their loans caused “undue hardship.”

However, the process of proving undue hardship has proven arduous and costly, resulting in less than 1% of bankruptcy filers with student loans successfully discharging their debts, according to a study conducted in 2020 by a law professor from Villanova.

The new procedure, which was implemented by the Justice Department in November of the previous year, introduces standardization and simplification to the process. Bankruptcy filers can now apply for student loan debt discharge by completing a 15-page form, and government attorneys determine eligibility based on new guidelines recognizing what constitutes “undue hardship.”

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Rich Cordray, the chief operating officer of the Office of Federal Student Aid, commented, “It is evident that this improved process is assisting struggling borrowers. By partnering with the Justice Department, we will continue to streamline this process and provide student loan borrowers with a viable pathway to obtaining necessary relief through bankruptcy.”

It is important to note that while bankruptcy remains a solution for financial difficulties, it is not without consequences. Bankruptcy proceedings may involve the seizure of assets, and the individual’s credit score is significantly impacted for a prolonged period. However, the option to discharge student loan debt through bankruptcy now provides a fresh start for borrowers who have exhausted alternative options.

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The recent reforms to bankruptcy procedures were part of a series of changes made to the federal financial aid system last year. These changes were implemented with the aim of alleviating the financial burden on borrowers when the pandemic-induced suspension on interest and required payments concluded in October.

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