Biden administration updates form for new, simpler bankruptcy process

The Department of Justice has updated a key request form as part of a new process that could make it much easier for many borrowers to pay off their federal student loans in the event of bankruptcy.

Here is the latest.

Canceling student loans in bankruptcy has always been difficult

The federal bankruptcy code treats student loans very differently for bankruptcy purposes than almost any other type of consumer debt. A discharge from most forms of consumer debt, such as credit card debt or medical bills, is automatic at the end of a bankruptcy case, as long as the debtor meets the terms. However, student borrowers must demonstrate that they have “undue hardship” in order to receive a release. This is a difficult 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 “adversarial proceedings,” which is essentially a legal action that the borrower must bring against their student lenders in bankruptcy court. Student lenders, including the federal government, routinely oppose these discharge requests and have enormous resources to fight back in the adversarial process. As a result, it is difficult for borrowers to get student loan discharge, and many don’t even try.

Biden administration eases repayment of federal student loans in bankruptcy

Last fall, the Biden administration unveiled new policy directions this will fundamentally change the way the federal government handles undue hardship bankruptcy cases. Under the new policy, the Department of Justice and the Department of Education 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 can meet the undue hardship standard. If so, the Department of Justice will not object to a borrower seeking an undue hardship discharge, thereby clearing the way for the borrower to have their federal student loans forgiven through the bankruptcy process.

It is important to note that the policy change does not change the legal standard of undue hardship for student loan bankruptcy cases, nor does it mean that the borrower can avoid adversarial proceedings altogether. However, by providing a means for the federal government not to oppose a borrower, the new policy may significantly expand the availability of federal bankruptcy discharges for student loans, as a bankruptcy judge is much more likely to approve a discharge. if the request is unopposed in the adversarial procedure.

Updates to the Attestation Form for Student Loan Discharges in Bankruptcy

Last month, the Department of Justice updated the attestation form that borrowers must complete if they apply for the discharge of their federal student loans. The 15-page attestation form requests substantial information about the borrower’s financial situation and student loans, including:

• Student loan details, including loan balance, monthly payment, and status;
• The borrower’s monthly income and expenses, as well as their assets;
• Circumstances that may indicate that the borrower will not be able to repay their student loan in the future, such as if they are over 65, disabled, chronically unemployed, did not graduate, or have already repaid more than 10 years;
• Details of the borrower’s previous efforts to repay their federal student loans, including total payments, past deferment and forbearance periods, and efforts to contact their student loan officer or enroll in plans income-contingent reimbursement (IDR).

New updates to the attestation form include adjustments to monthly household income reporting, instructions clarifying when a borrower must provide additional information, new questions asking for details on the impact of loan closure, a school on a borrower’s ability to repay student loans, and more. detailed information about a borrower’s student loan repayment, deferment, forbearance, and consolidation history. The updates also clarify that if the borrower is disabled, the disability need not be “permanent”, only “chronic” to potentially be a basis for a bankruptcy discharge.

As this is a brand new process, it is too early to tell how successful the Biden administration’s bankruptcy policy changes will be. Borrowers interested in obtaining a bankruptcy discharge from their federal student loans should consult with a bankruptcy attorney licensed to practice in their state. You can find a local bankruptcy attorney through the National Association of Consumer Bankruptcy Attorneysor you can contact your state or local bar for a recommendation.

Further Reading on Student Loan Forgiveness

Will House Republicans ‘reverse’ student loan forgiveness and end student loan hiatus?

How to get approved for student loan forgiveness under the Borrower Defense Program, according to new guidelines

3 Student Loan Forgiveness Updates for 3 Critical Initiatives

Student Loan Forgiveness: These Deferment and Forbearance Periods May Count