It was long believed that student loans were impossible to repay in bankruptcy. Few borrowers even dare to try. To do so, debtors must file a separate lawsuit, facing a costly and stressful process with no guarantee of success. In some parts of the country, they had to prove that their financial lives were “hopeless” before a judge would be willing to cancel their student debt.
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But a recent analysis revealed a significant change: The vast majority of student debtors seeking to discharge their debts through bankruptcy are succeeding, largely thanks to a simpler legal procedure introduced three years ago.
According to a study by Jason Iuliano, a professor at the University of Utah SJ Quinney School of Law, debtors have an 87 percent success rate in getting most or all of their loans discharged through bankruptcy. This number represents an increase from 61% in 2017 and is more than double the rate of nearly two decades ago.
Although graduation rates have gradually improved in previous years, the most recent increase can be largely attributed to a change adopted by the Justice and Education departments during the Biden era, which provided clearer guidelines on the types of cases that could result in loan forbearance.
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Student loans are not discharged in bankruptcy as easily as other consumer loans, such as credit cards or medical debt. Debtors must file a separate lawsuit, called an incidental lawsuit, which many attorneys are unwilling to entertain.
In a traditional litigation process, borrowers must demonstrate that their student loans represent an “undue hardship,” a legal standard that Congress has never defined and that courts across the country have interpreted differently. Many jurisdictions define undue hardship using a rigid framework known as the Brunner test.
According to the Brunner criteria, the debtor must answer three questions before their debts can be forgiven: Can they currently repay their loans and maintain a minimum standard of living? Is your situation likely to persist for a significant portion of the pay period? And have they made good faith efforts to repay the loans?
With the new approach, each step of the test becomes easier to complete if the debtor can meet certain requirements. For example, if the debtor’s eligible expenses are equal to or greater than his or her income, this may satisfy the first condition. Being over 65 or having loans in the repayment phase for at least 10 years, for example, would meet the second condition.
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