More Americans with student loan debt file for bankruptcy following policy changes

Posted on December 12, 2023 at 12:08pm by

There has been an increase in borrowers who are filing for bankruptcy related to eliminating their student debt following recent federal government policy changes, which allow individuals to eliminate this type of debt if they meet certain economic hardship criteria.

The new guidelines were put in place in November 2022 with the goal of ensuring more transparent and consistent expectations for discharging student loan debt. Borrowers will first complete an attestation form so the government can assess the discharge request.

Next, the government will calculate whether the debtor’s expenses equal or exceed their income. If they do, the U.S. Justice Department and U.S. Department of Education will declare the borrower unable to pay their debts.

The DOJ will determine whether a borrower’s present inability to pay will continue in the future. They consider variables like retirement age, disability status, long-term unemployment and if the borrower did not complete their college degree.

Finally, the DOJ will determine whether the borrower has made a “good faith effort” to repay their loans, earn income and manage their expenses. After considering all of these factors, the Department will determine whether or not their debt is eligible to be discharged.

Only 632 borrowers through September 2023 have utilized the new guidelines since the policy change last year. While that number may seem small, this is an increase from the average annual rate of 480 borrowers using bankruptcy to eliminate student debt prior to the pandemic pause.

Because the pause was recently lifted, this increase is notable as Americans grapple with the resumption of payments and seek out solutions to financial distress.

As more borrowers become familiar with the new guidelines and this option, the DOJ expects the number to continue increasing. In an article from the Wall Street Journal, Associate Attorney General Vanita Gupta discussed how courts are agreeing with the recommendations to discharge student loans from eligible cases. Officials believe that the new guidelines are working well, and in nearly all cases of these new guidelines being in place, judges have accepted and agreed to full or partial discharges.

While the new guidance is meant to simplify the process for borrowers, filing for bankruptcy can still be complex. Having an experienced bankruptcy attorney can help with this. If you are interested in exploring how filing for bankruptcy may ease your financial distress from student debt, contact a member of our team at Sader Law Firm today at (816) 561-1818 for a free phone consultation and information on what will work best for you.