As President Biden’s broad plan to cancel student debt for thousands and thousands of borrowers faces mounting legal challenges, his administration took a separate step that would make it easier for essentially the most vulnerable student borrowers to clear their debts: through bankruptcy.
Unlike bank card bills, medical bills and other consumer debts, student loans aren’t mechanically wiped away in bankruptcy. Borrowers are required to file a separate lawsuit to attempt to accomplish that. It’s stressful, costly and notoriously difficult to fulfill 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 recent process that it said would help make sure that people in bankruptcy looking for relief on their federal student loans were treated more fairly, with clearer guidelines about what kinds of cases would end in a discharge.
The guidance “outlines a greater, fairer, more transparent process for student loan borrowers in bankruptcy,” Associate Attorney General Vanita Gupta said in a press release. “It would allow Justice Department attorneys to more easily discover cases during which we are able to recommend discharge of a borrower’s student loans.” (Individually, the Biden administration asked the Supreme Court on Friday to approve its student loan debt relief program — a key component of the president’s 2020 election campaign.)
Successive administrations have often taken a tough line on the flexibility of borrowers to make use of bankruptcy to discharge their student loans, aggressively contesting their cases in court. It was partly to discourage borrowers from even attempting to bring a bankruptcy case without first exploring other ways to scale back debt.
Consequently, the method became too burdensome for individuals who were most distressed.
Under the brand new guidelines, debtors will complete an “attestation form,” which the federal government will use to assist 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 individuals who had student debt filed for bankruptcy, in response to a 2020 evaluation by Jason Iuliano, an associate professor of law on the University of Utah.
But only a small sliver — lower than 1 percent — filed the separate lawsuit, referred to as an adversary proceeding, to attempt to have that debt discharged. After reviewing the policy changes, Professor Iuliano was hopeful that the brand new guidance would encourage more people to try.
“At a fast glance, the method seems reasonable,” he said. “It should increase the variety of student discharge requests while also making it far cheaper and easier to litigate those requests. It would be interesting to see how the reforms play out.”
The guidance comes roughly a 12 months after officials within the Education Department said they were working with the Justice Department to review their approach. Because it refined its playbook, the federal government also agreed to pause cases if debtors wished.
Borrower advocates, consumer bankruptcy lawyers and law professors who’ve been critical of the difficulties borrowers face took a cautiously optimistic stance on the policy changes.
“The brand new guidance has the potential to offer a meaningful avenue for relief, but its effectiveness will rely upon the way it is implemented by the Departments of Education and Justice,” said John Rao, staff attorney on the National Consumer Law Center.
Discharging student debt has turn out to be increasingly difficult over the past 4 a long time — and differing standards across the country mean a debtor’s consequence can vary based on where she or he lives.
Before 1976, student loans were wiped away in bankruptcy, just like every other type of consumer debt. But some lawmakers were concerned that professionals with expensive degrees and high earning potential could game the system, in order that they tightened the foundations: Borrowers could not receive a discharge inside five years of after they had to start out making loan payments, unless they may show that the debt posed an “undue hardship.”
The undue hardship standard isn’t defined within the bankruptcy code, so courts developed their very own definition — and the code is interpreted in a different way between jurisdictions.
In some, judges can consider the “totality of the circumstances” of their decision. But a lot of the country uses a stricter interpretation, called the Brunner test.
It was named for Marie Brunner, who filed for a discharge of her debt lower than a 12 months after she had accomplished a master’s degree. The case created a three-prong test: Can debtors maintain a minimal way of life based on their income and expenses while repaying the debt? Have they made a good-faith effort to repay the loans? And is their situation more likely to persist for a major a part of the repayment period?
Some courts take the test a step further, and require borrowers to exhibit a “certainty of hopelessness.”
Today, every debtor must meet some version of the undue hardship standard. In a long time past, meeting the usual was required only when you tried to discharge your debt in fewer than five years. But, over time, that window was eliminated, making everyone subject to the usual.
The brand new policy will still track the broad outlines of the Brunner test, however the Justice Department’s attorneys will recommend a discharge under certain circumstances. For instance, if a debtor’s expenses equal or exceed his or her income, a discharge could also be suggested if the borrower also meets other criteria: The debtor is of retirement age; didn’t earn a university degree; or has a disability or chronic injury, has a protracted unemployment history or has been in repayment for not less than 10 years.
The federal government may even consider whether the borrower has made a “good-faith effort” to earn income and pay back the loans.
Pamela Foohey, a professor on the Cardozo School of Law, said she believed the policy changes would lead the Justice and Education Departments to recommend more discharges, though the bankruptcy judge would make the final word decision. But she has concerns that the “good-faith” measure stays too vague and will discourage people from bringing cases.
“Nonetheless, that the guidance hopefully will provide consistency in how the D.O.J. and D.O.E. will assess each case is a major step forward,” Professor Foohey said.
Some bankruptcy judges have spoken out through strongly worded opinions, acknowledging that the landscape has modified since Brunner was decided and that the usual that emerged was too stringent.
During his presidential campaign, Mr. Biden pledged his support for the bankruptcy proposal recommend by Senator Elizabeth Warren, Democrat of Massachusetts, which might make each federal and personal student loans dischargeable, identical to other consumer debt. (The changes announced on Thursday apply only to federal debts.)
“For a few years, the treatment of people that borrowed money to go to high school has been much harsher than for individuals who ran up other forms of debts,” Ms. Warren said in a press release on Thursday. “Now, throughout the law, the Biden administration has begun to construct meaningful change.”
A president cannot change the bankruptcy code — doing so requires congressional approval. However the Education Department is often the essential defendant in these cases, so the federal government can revise its approach. And that’s what has been done here.
Though there was bipartisan support for related bills in Congress, none have gained traction. Senators Dick Durbin, Democrat of Illinois, and John Cornyn, Republican of Texas, introduced a bill in 2021 that might discharge federal student debt as a part of the bankruptcy process, but only 10 years after the primary payment was due.