One category of debt that bankruptcy has traditionally not eliminated is student loan debt, but the landscape is changing rapidly. Please note that this information may have changed since the date of publication.
The History of the Biden Administration’s Student Loan Forgiveness Efforts
In the fall of 2022, the U.S. Department of Education and the U.S. Department of Justice jointly released updated bankruptcy guidelines, drafted with the intention of making the bankruptcy process less challenging for those who owed student loan debt. Before those guidelines, it was nearly impossible for most people to eliminate education debt in a traditional bankruptcy proceeding.
While forgiveness was not automatic, bankruptcy attorneys were given a new, life-changing avenue to help their clients to free themselves from these debts. However, concerns surfaced that students would recklessly amass education debts and then attempt to use the new rules to walk away from their bills – even if bankruptcy would not have otherwise been an option for them. Because of these reservations, policymakers have continued to tweak the stipulations associated with the discharge of student loans via bankruptcy. Borrowers were soon required to prove “undue hardship” or a “certainty of hopelessness,” although government attorneys fought back against many of the requests that came in under the program.
In June 2023, the Supreme Court struck down President Biden’s plan to cancel up to $20,000 in student debt, and the Executive Branch began developing a new strategy for forgiving student debt.
Earlier this year, the Biden administration updated the student loan bankruptcy policy, which experts say effectively puts student loans on par with more traditional debt categories in bankruptcy court. Those who owe money from a student loan can complete a 15-page form outlining their financial challenges and making their case for debt forgiveness.
Attorneys note that while the government used to aggressively fight most discharge requests associated with student loans, the new policy has seen many debts successfully forgiven by those proving financial need and a history of good faith payments.
UPDATE, MAY 2024: This month, President Biden announced that the student debt of 160,500 additional borrowers would be canceled. This latest move represents the administration’s ongoing commitment to providing relief even after the Supreme Court decision. With the recent round of forgiveness, the administration has erased a total of $167 billion in student loans for 4.75 million people, or about 10% of those with student loans in the United States.
Alternatives to Bankruptcy for Students
While student loan borrowers may benefit from the new rules and policies, most financial experts recommend that they pursue other potential avenues before filing for bankruptcy. They cite the amount of time that bankruptcy records are tied to the individual’s credit report, making it difficult to purchase a home, rent an apartment, or obtain a car – all necessary for students just beginning their independent lives.
Those who benefited from the Federal student loan program have various ways to reduce their debt, including income-based plans, economic hardship, and unemployment deferments. Some borrowers—such as those who are living with cancer or chronic disabilities—do have alternate opportunities for relief.
The Landscape is Constantly Evolving
Because rules continue to change, and the legality of these issues has been challenged, borrowers who are in financial crisis and considering bankruptcy should speak with a bankruptcy attorney before filing. An experienced attorney can help you to understand the policies as they exist today and what may be coming in the near future. They may also be able to point you in the direction of a certified credit counselor before filing for bankruptcy.
Richard V. Ellis is a local bankruptcy attorney with decades of experience helping Sarasota residents. If you have questions about the current state of student loan forgiveness and bankruptcy or about the process, call our offices today.
