Student Loan Forgiveness Through Bankruptcy: Biden’s New Policy is Starting to Work

The Biden administration implemented a major bankruptcy policy change last year that's designed to make it easier for some borrowers to discharge their federal student loans in bankruptcy. This new policy is not as far-reaching as what could be achieved through legislation (Bankruptcy reform legislation appears to be stalled in a bitterly-divided Congress.) So, this policy change was enacted as a practical solution that could have real impacts on student loan borrowers.

Advocates for student loan borrowers had expressed cautious optimism about the reforms, praising the changes but noting that only time would tell whether the initiative would actually make a difference. But six months into the policy change, it now appears that the new flexibilities afforded by the reforms are starting to work.

Here's the latest.

Student Loan Bankruptcy Discharges Historically Difficult to Achieve

The United States bankruptcy laws treat student loan debt in a way that is distinct from most other forms of debt. Most types of consumer debt, such as credit card debt, installment contracts, and medical bills, can be discharged through bankruptcy – as long as the borrower lists the debts on bankruptcy schedules and complies with the terms of the bankruptcy (which can involve liquidating assets, attending court hearings, or making a series of agreed-upon payments, depending on the debtor’s financial situation and the type of bankruptcy involved). At the conclusion of the bankruptcy, the debts listed on the bankruptcy schedules are discharged upon the order of a bankruptcy judge.

But student loans can only be discharged through bankruptcy if the borrower demonstrates to the judge that repayment would present an, “undue hardship.” The bankruptcy code doesn’t spell out what the term, “undue hardship,” means, so bankruptcy courts have established precedent-setting decisions defining that phrase and setting out specific tests used to determine if a debtor meets the standard. Historically, these tests have been very difficult for borrowers to meet; in some cases, borrowers must show that there is a, “certainty of hopelessness,” about their situation.

To even get to the question about whether a student loan borrower has an undue hardship, they must initiate something called an, “adversary proceeding,” which is basically a lawsuit within the bankruptcy process. Borrowers must effectively “sue” their student loan lenders in bankruptcy court to try to convince a judge that they have an undue hardship, within the meaning of the bankruptcy code and the associated court cases. Student loan lenders, in turn (including the federal government) typically oppose the borrower in undue hardship adversary proceedings. And these lenders will almost always have far more resources and powerful attorneys, creating an uneven playing field during the protracted legal battle.

The result of this bankruptcy system is that while it’s certainly not impossible to eliminate student loan debt in bankruptcy, it can be very challenging. And it often requires a lengthy, costly, and stressful litigation process to even have a shot at prevailing.

Biden's New Student Loan Bankruptcy Policy

Last fall, the Biden administration announced a collaborative effort by the Education Department and the Department of Justice to establish a new policy designed to make it easier for federal student loan borrowers to seek a discharge of their student debt in bankruptcy. A president and their administration cannot unilaterally change the law; only Congress can do that. But they can choose their level of enforcement and create some wiggle room for themselves by exercising discretion.

Under the new policy, borrowers looking to discharge their government-held federal student loans can try to demonstrate that they have an undue hardship by completing a self-attestation form and submitting it to attorneys representing the government. The form requests detailed information about the borrower’s financial situation, including income, expenses, assets, extenuating circumstances, and their prior good faith efforts to repay their student loan debt. The government would review the information provided on the self-attestation form and determine if the borrower has an undue hardship. If so, they would choose not to oppose the borrower’s adversary proceeding seeking to discharge their student debt.

While the new policy technically does not eliminate either the undue hardship standard or the requirement that the borrower initiate an adversary proceeding, in theory it can significantly simplify and streamline the process. By not opposing a borrower’s efforts to seek a discharge of their student loans, the parties can avoid lengthy and costly litigation. And with a borrower’s request for a discharge unopposed in court, a bankruptcy judge is much more likely to approve a discharge petition.

Biden's bankruptcy policy starting to yield results

Bankruptcy practitioners and consumer advocates knew that it would take some time to determine if the new Biden policy was working. A policy could sound great when it’s first announced, but if it’s not actually being implemented adequately in practice, then it’s not an effective reform.

But there are some early signs that the new policy is working. Last week, the National Student Legal Defense Network (NSLDN) – a nonprofit legal group representing student loan borrowers – announced with Attorney Latife Neu of Neu Law, PLLC that they had successfully obtained a discharge of $78,000 in federal student loan debt of their client under the new policy.

The borrower in that case is a public school employee in Washington State who attended a now-shuttered for-profit college that closed before she could finish her program, according to a statement by NSLDN. The borrower tried to repay her student loans when they first entered repayment nearly 30 years ago, but she was unable to afford the required payments, resulting in penalties and interest charges. She finally filed for bankruptcy in 2014, but she was unable to discharge her student debt at that time under the undue hardship standard. But under the new Biden administration policy, she tried again and completed the attestation form, and this time she was successful.

“This relief is going to be absolutely life-changing for Ms. Dodson,” said Attorney Neu in a statement. “We proved that she could never have paid these loans off without serious hardship. I’m proud to have represented Ms. Dodson in her case and I look forward to helping other borrowers put their student loans behind them.”

NSLDN President Aaron Ament stated, “We’re proud to have fought for these long overdue reforms, and we’re happy to see them in practice. For too long, the federal government was fighting borrowers in bankruptcy court based on overly-stringent guidance. We’re hopeful these new policies give more student loan borrowers like Ms. Dodson a chance at a financial fresh start.”

Student Loan Forgiveness Through Bankruptcy Going Forward

The Biden administration’s bankruptcy policy changes are starting to have a real impact for student loan borrowers. However, it is important to note that the policy only applies to federal student loans held by the government. Private student loans are not eligible for relief via the self-attestation process, as the government has no authority to force private student loan lenders to abide by the same process absent of the legislation passed by Congress to change the bankruptcy code.

In addition, without new legislation, a future presidential administration could simply rescind the policy. That would return the treatment of federal student loans in bankruptcy to the way things were before last fall’s announcement. There was a bipartisan effort during the last Congressional session to pass bankruptcy reform legislation, but those efforts ultimately did not yield results. And the current obstinately-divided Congress appears unlikely at this time to try again.

In the meantime, federal student loan borrowers who want to evaluate their potential eligibility for relief under the new policies should consult with a consumer bankruptcy attorney licensed to practice in their jurisdiction. You can start the search by reviewing attorneys who are members of the National Association of Consumer Bankruptcy Attorneys (NACBA), a national bar association for lawyers who represent consumer debtors in bankruptcy cases.