In a significant change, the Biden administration has implemented new guidelines for the discharge of education debt in bankruptcy court. This move aims to provide struggling borrowers with a fresh start and an opportunity to alleviate their financial burden. Previously, it was extremely challenging for student loan borrowers to walk away from their debt in bankruptcy court. However, the new process has seen a surge in bankruptcy cases filed by student loan borrowers, indicating a positive response to the relaxed guidelines.
One of the primary reasons student loans are harder to discharge than other debts is due to the high bar set by Congress. Initially, borrowers were required to wait at least five years after starting repayment to file for bankruptcy. This waiting period was later increased to seven years. While these waiting periods were ultimately removed, borrowers still had to prove that their student loans posed an “undue hardship” to discharge them. Additionally, they had to navigate a separate and time-consuming “adversary proceeding” outside of the standard bankruptcy process.
Under the new process, borrowers complete a form that assists the government in evaluating their discharge request. The debtor’s expenses are compared to their income using existing IRS Collection Financial Standards. If a borrower’s expenses equal or exceed their income, the Justice Department deduces that they lack a present ability to pay. Future ability to pay and a record of “good faith efforts” are also significant factors in the evaluation process.
Consumer advocates caution that bankruptcy should only be considered by borrowers in extreme financial distress. Filing for bankruptcy can have long-lasting effects on credit reports and may impede borrowers from accessing future financial opportunities such as buying a house or applying for loans. Before pursuing bankruptcy, borrowers are advised to explore alternative relief options such as federal payment plans with $0 monthly payments and deferments based on economic hardship or unemployment.
It is important to note that President Joe Biden’s plan to cancel up to $20,000 in student debt was struck down at the Supreme Court. However, there are ongoing efforts to forgive education debt, potentially benefiting borrowers facing financial hardship. Borrowers considering bankruptcy may want to wait to see the outcome of these initiatives.
Q: Can student loan debt be discharged in bankruptcy court?
A: Yes, under the new guidelines implemented by the Biden administration, it has become easier for student loan debt to be discharged in bankruptcy court.
Q: What was the previous difficulty in discharging student loan debt through bankruptcy?
A: Congress set high standards, requiring borrowers to wait several years after repayment and prove “undue hardship” in a separate proceeding.
Q: When should a borrower consider bankruptcy?
A: Consumer advocates recommend bankruptcy as a last resort for borrowers in extreme financial distress after exploring alternative relief options.
Q: What relief options are available to federal student loan borrowers?
A: Federal student loan borrowers have access to payment plans with $0 monthly payments and deferments based on economic hardship or unemployment.
Q: What should borrowers in financial hardship do if considering bankruptcy?
A: It is advisable to consult with a nonprofit credit counselor and stay updated on ongoing initiatives aimed at forgiving education debt.