Student Loan Forgiveness: Biden Administration Updates Form For New, Easier Bankruptcy Process
The Justice Department has updated a key application form under a new process that may make it much easier for many borrowers to discharge their federal student loans in bankruptcy.
Here’s the latest.
Discharging Student Loans In Bankruptcy Has Historically Been Challenging
The federal bankruptcy code treats student loans much differently for bankruptcy purposes than nearly any other kind of consumer debt. A discharge of most forms of consumer debt, like credit card debt or medical bills, is automatic upon completion of a bankruptcy case, as long as the debtor complies with the terms. Student loan borrowers, however, must demonstrate that they have an “undue hardship” in order to receive a discharge. This is a challenging legal standard to meet, and bankruptcy courts have imposed rigorous standards and tests that can make it nearly impossible for some borrowers to prevail.
To even demonstrate undue hardship, borrowers must initiate an “adversary proceeding,” which is essentially a lawsuit that the borrower must file against their student loan lenders in bankruptcy court. Student loan lenders, including the federal government, routinely oppose these discharge petitions and have enormous resources to fight back in the adversary proceeding. As a result, it is difficult for borrowers to win a student loan discharge, and many don’t even try.
Biden Administration Makes It Easier To Discharge Federal Student Loans in Bankruptcy
Last fall, the Biden administration unveiled new policy guidance that will fundamentally change how the federal government handles undue hardship bankruptcy cases. Under the new policy, the Justice Department and Education Department will review a borrower’s financial situation based on information provided by the borrower on a federal attestation form. Officials will then determine whether the borrower may meet the undue hardship standard. If so, the Justice Department will not oppose a borrower seeking an undue hardship discharge, clearing the way for the borrower to get their federal student loans wiped out through the bankruptcy process.
Importantly, the policy change does not change the undue hardship legal standard for student loan bankruptcy cases, nor does it mean the borrower can completely avoid an adversary proceeding. However, by providing a path for the federal government to not oppose a borrower, the new policy may dramatically broaden the availability of federal student loan bankruptcy discharges, as a bankruptcy judge is far more likely to approve a discharge if the request is unopposed in the adversary proceeding.
Updates to Attestation Form For Student Loan Discharges in Bankruptcy
Last month, the Justice Department made some updates to the attestation form that borrowers must complete if they are seeking a bankruptcy discharge of their federal student loans. The 15-page attestation form requests substantial information about the borrower’s financial circumstances and student loans, including the following:
- Student loan details including the loan balance, monthly payment, and status;
- The borrower’s monthly income and expenses, as well as assets;
- Circumstances that may indicate that the borrower will be unable to repay their student loans in the future, such as if the borrower is over 65, is disabled, is chronically unemployed, did not complete their degree, or has already been in repayment for longer than 10 years;
- Details on the borrower’s prior efforts to repay their federal student loans including total payments, past periods of deferment and forbearance, and efforts to contact their student loan servicer or enroll in Income-Driven Repayment (IDR) plans.
The new updates to the attestation form include tweaks to the reporting of monthly household income, clarifying instructions regarding when a borrower needs to provide additional information, new questions seeking details on whether a school closure impacted a borrower’s ability to repay their student loans, and more detailed information on a borrower’s student loan repayment, deferment, forbearance, and consolidation history. The updates also clarify that if the borrower is disabled, the disability does not have to be “permanent,” only “chronic” to potentially be a basis for a bankruptcy discharge.
Since this is a brand new process, it is too early to say how successful the Biden administration’s bankruptcy policy changes will be. Borrowers interested in pursuing a bankruptcy discharge of their federal student loans should consult with a bankruptcy attorney licensed to practice in their state. You can find a local bankruptcy attorney via the National Association of Consumer Bankruptcy Attorneys, or you can contact your state or local bar association for a referral.
Further Student Loan Forgiveness Reading
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