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Home ยป Student Loan Borrowers Find Hope in Bankruptcy as Debt Discharges Rise
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Student Loan Borrowers Find Hope in Bankruptcy as Debt Discharges Rise

EditorEditorNovember 18, 20234 Mins Read
student loan debt discharged in bankruptcy
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In November 2022, the Biden administration made a change in policy about federal student loans. This change lets more student loan borrowers get rid of their debt in bankruptcy court. Before this change, it was not as easy to do that. Now, things are different, and more people can find relief from their student loan debt.

During the fall of 2022, the US Department of Education and the US Department of Justice introduced new guidelines for bankruptcy. These updates aim to help people facing financial difficulties to easily eliminate their student loans in court.

Before these changes, it was hard, and sometimes impossible, for individuals to free themselves from education debt through the usual bankruptcy process.

The total student debt in the United States is over $1.7 trillion, and approximately 7% of borrowers owe more than $100,000. Before the Covid-19 pandemic, around 10 million borrowers were behind on payments or in default.

For a long time student loans were handled differently in bankruptcy courts compared to other debts. This approach faced criticism from legal experts and advocates for consumers.

The numbers are small but satisfying

In the initial ten months since introducing a new bankruptcy process last November, the Department of Education revealed that 99% of borrowers using it had some of their student loan debt discharged.

Despite the small number of 632 people utilizing this process compared to total bankruptcy filings in 2022, officials anticipate a substantial increase as more lawyers, both within and outside the government, become familiar with the updated guidelines.

Joyful declaration by Attorney Vanita Gupta

Associate Attorney General Vanita Gupta expressed joy saying,

“I am thrilled that our one-year review indicates that our efforts have made a real difference in borrowers’ lives.”

This suggests that the work undertaken has positively impacted the lives of those with loans, as highlighted in the statement.

Within the initial ten months of the updated policy, there was a noteworthy rise in the number of bankruptcy cases filed by student loan borrowers, surpassing 630 cases.

 This surge is described as a “significant increase” compared to previous years, as reported by the departments involved.

They reported that most borrowers who sought discharge have been granted either full or partial discharges.

Decades-long challenge: The history and hurdles of discharging student loans in bankruptcy

In 2018, Jerome Powell, the chairman of the Federal Reserve, expressed bewilderment, stating he was “at a loss to explain” why student loans couldn’t be discharged in bankruptcy. He also cautioned that the increasing debt could have a long-term impact, potentially slowing down economic growth.

The challenge of discharging student loans in bankruptcy traces its roots to the 1970s. During that time, lawmakers introduced a requirement that mandated student loan borrowers to wait at least five years after starting repayment before filing for bankruptcy. 

This change addressed the concerns raised by policymakers and commentators who feared that students might accumulate a significant amount of loans and then attempt to eliminate them shortly after graduation.

Evolution of student loan discharge: from waiting periods to softened policies

According to higher education expert Mark Kantrowitz, those concerns were mostly exaggerated.

Kantrowitz mentioned,

“Only borrowers facing extreme financial hardship seek to have their debt erased.”

He highlighted that a bankruptcy discharge adversely affects credit for seven years, making it difficult to obtain credit cards, auto loans, and mortgages during that period.

However, in 1990, the waiting period was extended to seven years. 

Almost a decade later, the rules underwent another change, demanding individuals with federal or private student loans to demonstrate an “undue hardship” for discharge. 

Notably, Congress never clearly defined this term, leading to complaints from lawyers and advocates about the resulting uncertainty and unfairness in the courts.

Describing the updated policy, Kantrowitz noted,

“The new policy represents a softening of the harsh stance on the discharge of federal student loans.”

He further observed that the courts were shifting towards treating student loans more similarly to other forms of debt.

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