WASHINGTON—The Department of Justice, working with the Department of Education, has introduced a new process that makes it easier people to discharge their federal student loans in bankruptcy.
The discharge of student loans in bankruptcy has been a controversial issue since the 1970s and the subject of several rulemakings in Congress. The issue has been similarly divisive in credit unions, as well. In 2005, while the credit union trade groups expressed support for the passage of the Bankruptcy Abuse Prevention and Consumer Prevention Act, there were strong objections from some within the credit union community that the new rules would only drive many people deeper into a debt they could not escape under any circumstances.
The Biden Administration has also been working to ease those restrictions. Now, according to the DoJ, the new process will help ensure “consistent treatment of the discharge of federal student loans, reduce the burden on borrowers of pursuing such proceedings and make it easier to identify cases where discharge is appropriate.”
The Associate Attorney General distributed guidance outlining the new process to all U.S. attorneys, DoJ said.
‘A Higher Bar’
“Congress has set a higher bar for discharging student loan debt compared to other debt — borrowers who seek to discharge their loans through bankruptcy must demonstrate that they will suffer ‘undue hardship’ unless the debt is discharged,” the DoJ said. “Although the bankruptcy judge makes the final decision whether to grant a discharge, the new process announced provides Justice Department attorneys with clear standards for recommending discharge to the judge without unnecessarily burdensome and time-consuming investigations. 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.”
Added U.S. Under Secretary of Education James Kvaal, “Congress may have set a higher bar for granting student loan discharges during bankruptcy, but in practice that bar has become very difficult for deserving borrowers to clear. After decades of inaction in Washington, our Department of Education team was determined to partner with the Justice Department to craft clearer, fairer, and more practical standards to guide recommendations for student debt discharges during bankruptcy proceedings. This guidance is an important step toward helping struggling borrowers, many of whom never completed college or were misled into debt by dishonest schools.”
Adds ‘Safeguards’
According to the DoJ, simplifying the process and establishing clear standards will “significantly reduce the burden” on borrowers and government attorneys, “provide a clear path for borrowers to seek discharges” and “add safeguards to promote consistency and predictability.”
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