U.S. Sets Path to Clear Student Debt in Bankruptcy

"The Biden administration on Thursday released new guidelines that will make it easier for economically distressed student loan borrowers to discharge their student debt in bankruptcy proceedings.

The long-awaited guidelines from the Justice Department and Education Department set specific requirements for borrowers to prove that they are experiencing economic distress. The government will calculate whether a debtor's expenses equal or exceed a debtor's income, and if they do, the Justice Department will declare that the borrower is unable to pay their debts.

The Justice Department will also assess whether a borrower's present inability to pay will likely persist in the future, taking into account factors like retirement age, disability, long-term unemployment or if the borrower didn't finish their degree.

Under the current system, which the administration described as unnecessarily burdensome, the federal government often delves into borrowers' financial history to show they haven't demonstrated their economic hardship.

"Today's guidance outlines a better, fairer, more transparent process for student loan borrowers in bankruptcy," said Associate Attorney General Vanita Gupta.

The changes come as the Biden administration's mass student debt cancellation plan has been blocked by two federal courts. That program, which would cancel up to $20,000 for borrowers who make under $125,000 or $250,000 for a married couple, relies on a different definition of economic hardship -- namely, that the negative economic effects of the pandemic allow the administration to forgive debt on a broad scale.

Student loans are treated differently in bankruptcy proceedings than other forms of consumer debt. In bankruptcy legislation, Congress "attempted to balance the goal of providing debtors in dire financial straits with a 'fresh start' against the countervailing goals 'of preventing abuse of the student loan program,'" according to the Congressional Research Service. Creditors -- in the case of federal student loans, the Education Department -- have the opportunity to contest claims in court, making it time-consuming, expensive and intimidating for borrowers to even attempt the legal maneuver.

The logic of the bankruptcy code carve-out was that recent college graduates might not have many tangible assets that could be given up, but the education they received at least theoretically enables them to have higher lifetime earnings than they would have had otherwise. So, a recent graduate shouldn't be able to game the system by financing their education with loans, claiming hardship, receiving a discharge and then enjoying the benefits of their education without any debt.

In practice, that has made student loan discharges in bankruptcy cases virtually impossible.

The new guidelines recognize that the federal government isn't like other creditors like banks. "The student loan programs clearly have objectives other than collecting money," said John P. Hunt, a law professor at the University of California-Davis.

Congress hasn't taken up legislation to revise the bankruptcy code despite bipartisan support for the idea. Republican Sens. John Cornyn of Texas and Josh Hawley of Missouri joined with Judiciary Committee Chairman Dick Durbin (D., Ill.) to support a 2021 bill that would ease student loan discharge through bankruptcy, and Mr. Hawley followed up with his own related legislation in September. None of the efforts have gained traction yet.

"It is regrettable that the Biden Administration chose to release this unilaterally instead of doing the hard work of negotiating with Congress on a long-term solution that would give borrowers certainty no matter who is in the White House," a spokesperson for Mr. Cornyn said." [1]

1. U.S. News: U.S. Sets Path to Clear Student Debt in Bankruptcy
Rubin, Gabriel T. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 18 Nov 2022: A.3.