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Biden Administration Caves To Pressure On Student Debt Bankruptcy

Nov 17, 2022 Julia Rock
The Justice Department announced Thursday it would no longer fight bankruptcy efforts of federal student loan borrowers if they are being crushed by debt.
Biden Administration Caves To Pressure On Student Debt Bankruptcy
(AP Photo/Patrick Semansky)

The Biden administration announced Thursday that it will change how it treats federal student loan borrowers seeking to discharge their debt through the federal bankruptcy process. Previously, the Department of Justice (DOJ) opposed any efforts by student loan borrowers to have their debt discharged through bankruptcy — which is already nearly impossible, even without opposition from government lawyers.

The move represents an about-face from the Biden administration. Up to this point, Biden’s DOJ actually moved to appeal the rare bankruptcy cases where student debtors were successful in discharging their debt. The Justice Department dropped those appeals after The Lever reported on the cases.

But now, following pressure from Senators, the public, and news outlets like The Lever, the Justice Department has announced a new stance.

“Although the bankruptcy judge makes the final decision whether to grant a discharge, the new process announced today provides Justice Department attorneys with clear standards for recommending discharge to the judge without unnecessarily burdensome and time-consuming investigations,” said a DOJ press release on the new guidance. “The new process will also help borrowers who did not think they could get relief through bankruptcy more easily identify whether they meet the criteria to seek a discharge.”

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Unlike every other type of consumer debt, student debt cannot be eliminated through bankruptcy, unless the debtor can prove the obligation is causing “undue hardship,” which is a nearly impossible legal standard to meet.

The new guidance stipulates that Justice Department attorneys should support a discharge if a debtor is unable to meet their obligations because their expenses equal or exceed their income, when this inability to pay is likely to persist, and if the debtor has made “good faith efforts” to “earn income, manage expenses, and repay their loan.”

Advocates have long asked for this type of guidance, because without it, few people even seek to have their debt discharged, knowing that they will have to both fight the Justice Department and meet a high legal standard.

The new guidance drew praise from one advocacy group that has been pressuring the Biden administration to make it easier for student loan borrowers to eliminate their debt through bankruptcy.

“For far too long, the Department has stonewalled bankrupt borrowers who are already facing incredible hardship,” said Aaron Ament, president of the National Student Defense Legal Network, 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.”

Sen. Elizabeth Warren (D-Mass.), a longtime advocate for bankruptcy reforms who has pressured the Justice Department to stop fighting student debtors in bankruptcy cases, also welcomed the new guidance.

“The Biden administration has taken an important step forward to reform a deeply broken bankruptcy system that has made it nearly impossible for Americans to deal with student debt, even when they’re in severe financial stress,” Warren said in a statement to The Lever. “I look forward to working with the Department of Education and the Department of Justice to ensure that struggling student borrowers can access the relief these changes aim to deliver.”

Meanwhile, bipartisan Senate legislation to make student debt dischargeable through bankruptcy has not been brought for a vote by Senate Majority Leader Chuck Schumer (D-N.Y.). Schumer previously told The Lever he supported student debt being dischargeable through bankruptcy.

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