For a long time, student loans were considered impossible to eliminate in bankruptcy. Few borrowers dare to even try.
To achieve this, borrowers must file a separate lawsuit and go through a costly, stressful process for which there are no guarantees. In some parts of the country, they had to prove their financial situation was “hopeless” before a judge would agree to cancel their student debt.
But a recent analysis has uncovered a significant shift: The vast majority of student debtors who apply for bankruptcy relief are receiving it, in large part because of a simpler legal process introduced three years ago.
According to the study by Jason Iuliano, a professor at the University of Utah's SJ Quinney College of Law, borrowers have an 87 percent success rate when it comes to having most or all of their loans rejected in bankruptcy. That's up from 61 percent in 2017 and more than double the rate nearly two decades ago.
“That's strikingly high considering the impossibility of getting rid of it,” said Professor Iuliano, whose analysis was published this month in the American Bankruptcy Law Journal and who has been studying the issue for 15 years.
Although success rates had slowly improved compared to previous years, the recent increase is largely due to a Biden-era change passed by the Justice and Education Departments that provided clearer guidelines for what types of cases would result in loan discharge. It also allowed borrowers to present their cases on a simplified 15-page certification form.
Student loans are not paid off in bankruptcy as easily as other consumer loans, such as credit card or medical debt. Debtors must file a separate lawsuit called an adversarial proceeding, which many attorneys are unwilling to do.
The three-year-old trial has tried to streamline all of that. And the current analysis shows – at least for about 650 completed cases filed from mid-October 2022 to mid-November 2023 – that it worked.
“A scary process, but worth the risk”
Amy Howdyshell, a 43-year-old registered nurse, recently won the cancellation of more than $78,000 in federal student debt, most of which she accumulated at a for-profit college for a business degree she never received.
She and her husband, a warehouse forklift driver, filed for bankruptcy in 2023 after he suffered serious medical problems, including a heart attack. But Ms. Howdyshell was referred to another attorney, Malissa Giles, who had more experience with student loans, and she thought Ms. Howdyshell was a good candidate. They filed their lawsuit last year.
Ms. Howdyshell, who lives in Virginia, said the school mismanaged her financial aid and did not allow her to enroll in her final semester or release her transcript. She gave up the credits she earned, but later attended another school and became a licensed practical nurse, paying out of her own pocket and through employer programs.
But her old debts had cast a long shadow over her family's finances, making it impossible to save for a down payment on a house or make progress on retirement planning.
“Now I have the financial freedom to pursue my dreams of owning a home,” said Ms. Howdyshell. “It was a scary process, but the risk was worth it.”
She is just one of many borrowers who initiate adversarial proceedings. According to Professor Iuliano, the newer procedure has not yet encouraged enough debtors, or perhaps their legal advisors, to try it.
Based on previous research, he estimated that 99 percent of student loan borrowers who filed for bankruptcy had not even asked the judge to consider paying off their loans.
“This is a big problem,” he added.
But change could be beginning. According to an analysis of public records by Stretto, a legal services and technology company, 1,693 student loan borrowers have filed adversarial proceedings this year, 12 percent more than in 2024 and more than 92 percent more than 2023.
In Professor Iuliano's analysis sample, most student debtors were women. The typical borrower was 47 years old and owed $115,000 in student loans, with her expenses exceeding her income by $200 each month.
In a traditional adversarial process, borrowers must prove that their student loans pose an “undue hardship,” a legal standard that Congress has never defined and that courts across the country have interpreted differently. As a result, borrowers received uneven outcomes.
Satisfy the test and the judges
Many jurisdictions define undue hardship using a rigid framework known as the Brunner test.
Under Brunner, debtors must answer three questions before their debts can be forgiven: Can they currently pay the loans and maintain a minimal standard of living? Is it likely that their situation will continue for a significant portion of the repayment period? And have they made a good faith effort to repay the loans?
With the newer approach, it is easier to pass each part of the test if the debtor can check certain boxes. For example, if a debtor's allowable expenses equal or exceed his income, this may satisfy the first question. The second question would be fulfilled, for example, if you are over 65 years old or have had a loan in the repayment phase for at least 10 years.
If the federal government's analysis finds that a borrower has passed the test, Justice Department lawyers can recommend relief to a bankruptcy judge.
In the vast majority of cases, the judges do just that. But in at least two cases, the judges did not immediately issue a dismissal, despite the government's decision to do so.
“Some judges are taking a more aggressive stance and not easily approving these settlements,” said Stanley Tate, a consumer attorney who specializes in student loans.
In one case, a 68-year-old retired teacher with heart problems and a dying partner was nearly $125,000 in debt – an amount that had ballooned from the $36,000 he borrowed to attend the University of North Carolina at Chapel Hill, court documents show.
Given his limited income and circumstances, it was clear to his attorney and the federal government that he could not repay the loan. But the judge couldn't get over the fact that the borrower had only repaid $9,000; He had requested forbearances or forbearances 38 times and tried to enter into a payment plan that would tie the amount of his payments to his income.
“It doesn’t smell right to me,” Judge David M. Warren of the U.S. Bankruptcy Court for the Eastern District of North Carolina said during a hearing last winter. “I don’t like it and I don’t think it’s an appropriate use of the justice system.”
The judge wanted to hold a hearing to learn more, but the Education Department ultimately re-counted the borrower's payments, allowing it to issue administrative relief in 2024 through the Public Service Loan Forgiveness program, his attorney said. This meant that the borrower received compensation out of court.
The legal community questioned whether the Trump administration, which is pursuing an aggressive plan to dismantle the Education Department, wants to eliminate the guidelines.
A Department of Education spokeswoman said there were currently no plans to change the program. “The department is currently focused on assisting borrowers with repayment and improving the health of the portfolio,” said Ellen Keast, press secretary for higher education at the department.
The Justice Department, which often represents the Education Department in bankruptcy cases and works with it on federal student loans, did not immediately respond to a request for comment.
Although the legal guidelines were put in place during the Biden administration, the first Trump administration had acknowledged that discharging debts in bankruptcy was not easy: The Department of Education sought public comment in 2018 on the high legal standards and sought to investigate whether borrowers were “inadvertently discouraged” from seeking debt relief.
Igor Roitburg, a senior managing director at Stretto, which also helps lawyers screen student loan debtors and prepare documents for those eligible for discharge, said he doesn't expect the Trump administration to abandon the policy. Cases continue to wind their way through the system, and he expects the number of filings to increase.
“It is also very important to understand what this process does – it is a thorough, case-by-case review,” Mr Roitburg added. Not all distressed borrowers are eligible for bankruptcy, nor are all applicants eligible for student loan relief, but it provides an important safety net for those who do.
More and more borrowers are on the brink. The student loan landscape is in upheaval due to legal challenges that will end the Biden-era SAVE repayment plan, the cheapest option. Congress's reconciliation bill this summer also eliminates the current repayment program menu and creates a new one. And foreclosures and wage garnishments for defaulted federal student loans are increasing again after a lengthy pause caused by the pandemic.
The weakest borrowers will look for alternatives.
Latife Neu, a Seattle attorney who has filed about 16 cases under the streamlined process and has several more in the pipeline, said she has heard from more people looking for options, including many borrowers nearing or in retirement.
“Borrower anxiety is very high right now,” she said.
Kirsten Noyes and Susan C. Beachy contributed to the research.