Student loans: Advocates cheer new guidance for debt bankruptcy discharges

Student advocates are cheering long-awaited changes to the difficult process to discharge student loan debt in bankruptcy.

The new streamlined process announced jointly by the Justice and Education Departments on Thursday should relieve some of the evidentiary burdens placed on borrowers to prove they are suffering a severe enough hardship to necessitate discharge in bankruptcy.

The move is a hard-fought win for borrowers following many calls from advocates for a moratorium on the Education Department’s practice of appealing student debt bankruptcy discharges.

“For far too long, the [Education] Department has stonewalled bankrupt borrowers who are already facing incredible hardship,” Aaron Ament, president of Student Defense, said in a statement. “The new guidance will go a long way towards ensuring the Department is working with borrowers, not against them, as they navigate already-difficult circumstances. We look forward to the agency quickly implementing these reforms.”

Documents for filing bankruptcy Chapter 7
Credit: Getty Images (danielfela via Getty Images)

New guidance

In theory, student loan debt can be discharged in a bankruptcy proceeding. If the bankruptcy court approves the discharge, the debtor has to submit a separate filing to prove “undue hardship” using the “Brunner test.”


The Brunner test requires debtors to meet three criteria: (1) an inability to pay loans and maintain a minimal standard of living; (2) the unlikelihood of financial circumstances improving in the future; and (3) the debtor made a good-faith effort to pay back the debt.

The new process will use data from the Education Department and a borrower attestation form that the Justice Department, in consultation with ED, will review to determine whether to recommend that the bankruptcy judge discharge the borrower’s student loan debt, according to the DOJ press release. The new process also seeks to bypass what the government called “burdensome and time-consuming investigations” for borrowers.

“Congress may have set a higher bar for granting student loan discharges during bankruptcy, but in practice that bar has become very difficult for deserving borrowers to clear,” said U.S. Under Secretary of Education James Kvaal. “Our Department of Education team was determined to partner with the Justice Department to craft clearer, fairer, and more practical standards to guide recommendations for student debt discharges during bankruptcy proceedings. This guidance is an important step toward helping struggling borrowers, many of whom never completed college or were misled into debt by dishonest schools.”

Hard-fought win

A graduating student wears a money lei, a necklace made of US dollar bills, at the Pasadena City College graduation ceremony, June 14, 2019, in Pasadena, California. - With 45 million borrowers owing $1.5 trillion, the student debt crisis in the United States has exploded in recent years and has become a key electoral issue in the run-up to the 2020 presidential elections.
A graduating student wears a money lei, a necklace made of US dollar bills, at the Pasadena City College graduation ceremony, June 14, 2019, in Pasadena, California. (Photo credit should read ROBYN BECK/AFP/Getty Images) (ROBYN BECK via Getty Images)

The new guidance is a change from the Education Department’s previous stance toward bankruptcy discharges.

Even when a few debtors managed to qualify under the Brunner test, the Education Department had opposed discharging the student loan debt — including debtors who had chronic or terminal illnesses like cancer or epilepsy.

Borrowers faced disparate treatment from the Education Department in bankruptcy court compared with its enforcement against for-profit colleges and executives with outstanding liabilities owed to the government, according to a report by the Student Defense.

When President Joe Biden was a presidential candidate, he agreed to embrace Sen. Elizabeth Warren’s (D-MA) plan to reform the way bankruptcy cases handle student loan discharge. However, after becoming president, the Education Department still opposed bankruptcy discharges.

“For years, Americans have called for fair bankruptcy reforms that provide student loan borrowers the same relief that others with credit card debt, auto debt, and other debts have had. Today’s announcement is a step in the right direction,” Cody Hounanian, executive director of the Student Debt Crisis Center (SDCC), said in a statement. “Many Americans are shocked when they find out that student loan borrowers have no way out from under crushing debt. They agree, seeking higher education should never mean people are sentenced to a lifetime of debt.”

Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda

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