Student loans discharged in bankruptcy

Student loans are notoriously difficult, if not impossible, to discharge in bankruptcy. This has led to ex-students being forced to continue to pay off their loans even when they age into Social Security. Now there is a change.

Biden Administration Offers New Path to Discharging Student Debt in Bankruptcy

The Justice and Education Departments said the process would be more fair and consistent for people in bankruptcy seeking relief on their federal student loans.
Tara Siegel Bernard

By Tara Siegel Bernard, The New York Times, Nov. 17, 2022

…
Unlike credit card bills, medical bills and other consumer debts, student loans aren’t automatically wiped away in bankruptcy. Borrowers are required to file a separate lawsuit to try to do so. It’s stressful, costly and notoriously difficult to meet 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 new process that it said would help ensure that people in bankruptcy seeking relief on their federal student loans were treated more fairly, with clearer guidelines about what types of cases would result in a discharge…

Under the new guidelines, debtors will complete an “attestation form,” which the government will use to help 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…

The Justice Department’s attorneys will recommend a discharge under certain circumstances. For example, if a debtor’s expenses equal or exceed his or her income, a discharge may be suggested if the borrower also meets other criteria: The debtor is of retirement age; did not earn a college degree; or has a disability or chronic injury, has a protracted unemployment history or has been in repayment for at least 10 years.

The government will also consider whether the borrower has made a “good-faith effort” to earn income and pay back the loans… The changes announced on Thursday apply only to federal debts, not consumer debt…[end quote]

This is a separate approach from the student loan debt discharge program that is currently being challenged in court.

Biden Administration Extends Pause on Federal Student Loan Payments

Legal challenges have stymied President Biden’s plan to forgive up to $20,000 in student debt for many borrowers

By Andrew Restuccia, The Wall Street Journal, Nov. 22, 2022

The Biden administration is extending a pause on federal student loan payments following legal challenges that have halted President Biden’s plan to forgive up to $20,000 in student debt for many borrowers.

Payments were set to resume Jan. 1, but they now will resume 60 days after litigation over the loan-forgiveness program is resolved or the program is implemented. While many people would have the entirety of their remaining loan balances erased through the debt-relief program, those who didn’t would be required to resume payments once the payment pause was lifted…[end quote]

As the cost of higher education has risen over the years entire generations of young people are delaying the usual adulting process of household and family formation which underpins the consumer Macro economy.

The new program is meant to relieve the burden on people who are bankrupted by their debts, not to give a free ride to those who have gained a foothold on the ladder of success and will be able to pay off their education debts.

The new program won’t be fought by the banks since commercial student loans won’t be affected. Only the taxpayer will bear the burden as the federal deficit will be increased.

This is brand new so no lawsuits yet.
Stay tuned.
Wendy

7 Likes

The deficit will increase. But then again people coming out of bankruptcy and gaining more consuming and saving power will possibly gain more of an upward mobility in life. In other words the point of investing as a society in education includes filling the tax coffers.

Forgetting the betterment of society means depleting this nation. I get someone’s ox gets gored. But most of the stay back do not get educated crowd do that endlessly to themselves. As for those who only see the deficit increasing please study public finance.