Bankruptcy enables individuals or entities to discharge or repay their debts under the protection of the federal bankruptcy court. There are different types of bankruptcy, including Chapters 7 and 13, each with its rules and implications.
Until recently, student loans were not dischargeable through bankruptcy unless the borrower could prove “undue hardship.” This made discharging student loans a significantly more challenging process than other debt types. However, more borrowers have been able to partially or fully discharge their federal student loans thanks to the current presidential administration policy change of November 2022.
Why student debt was difficult to discharge through bankruptcy
For a long time, federal student loans weren’t perceived the same as other types of debt in bankruptcy courts. As far as the 1970s, lawmakers required borrowers to wait five years after they began repaying their federal student loans before they could file for bankruptcy.
More recently, in 1990, the waiting period was increased to seven years, and as if that wasn’t enough, the rules charged almost a decade later, requiring that borrowers prove undue hardship before their loans could be discharged through bankruptcy.
The new policy gives hope to borrowers with outstanding loans
Biden’s administration policy change has significantly softened the harsh stance on the discharge of federal student loans. Finally, federal bankruptcy courts are starting to treat student loans like other debt.
The updated bankruptcy guidelines are making it easier for struggling debtors to erase their student loans in court. The U.S. Department of Justice and the U.S. Department of Education have reported a significant increase in the number of individuals filing for bankruptcy compared to previous years.
The new bankruptcy guidelines released by Biden’s administration have given hope to millions of borrowers who’ve been struggling with student loans for years. If you’re considering filing for bankruptcy, legal guidance can help you learn how the rules apply to your situation.