Biden administration offers new path to discharging student debt in bankruptcy

As President Joe Biden’s broad plan to cancel student debt for millions of borrowers faces mounting legal challenges, his administration took a separate step on Thursday that could make it easier for the most vulnerable student borrowers to clear their debts: through bankruptcy.

Unlike credit card bills, medical bills and other consumer debts, student loans aren’t automatically wiped away in bankruptcy; borrowers are required to file a separate lawsuit to try to do so. It’s stressful, costly and notoriously difficult to meet the strict legal tests to succeed, and most debtors don’t even try.

But, on Thursday, the Justice Department, in coordination with the Education Department, announced a new process that it said would help ensure that people in bankruptcy seeking relief on their federal student loans were treated more fairly, with clearer guidelines about what types of cases would result in a discharge.

“Today’s guidance outlines a better, fairer, more transparent process for student loan borrowers in bankruptcy,” Associate Attorney General Vanita Gupta said in a statement. “It will allow Justice Department attorneys to more easily identify cases in which we can recommend discharge of a borrower’s student loans.”

Under the new guidelines, debtors will complete an “attestation form,” which the government will use to help determine whether to recommend a discharge. If debtors meet certain requirements — including having expenses that exceed their income — government lawyers will recommend a full or partial discharge.

In each of the five years before the pandemic, roughly a quarter-million people who had student debt filed for bankruptcy, according to a 2020 analysis by Jason Iuliano, an associate professor of law at the University of Utah.

But only a small sliver — less than 1% — filed the separate lawsuit, known as an adversary proceeding, to try to have that debt discharged. After reviewing the policy changes, Iuliano was hopeful that the new guidance would encourage more people to try.

The guidance comes roughly a year after officials in the Education Department said they were working with the Justice Department to review their approach. The government also agreed to pause cases if debtors, as they refined their playbook, wanted to.