Full Discharge Ahead? An Empirical First Look at the New Student Loan Discharge Process in Bankruptcy

Abstract

The legal framework for discharging student loan debt held bankruptcy filers cases changed in November 2022 with the Biden Administration’s Department of Justice issuing its “Guidance for Department Attorneys Regarding Student Loan Bankruptcy Litigation,” fundamentally altering the legal framework for discharging student loan debt in bankruptcy cases. The Guidance aims to enhance consistency and equity by (1) ensuring transparent and consistent expectations, (2) reducing the burden on debtors, and (3) making it easier for DOJ attorneys to recommend discharging a debtor’s student loans. The DOJ has touted the new Guidance as having “made a real difference in borrowers’ lives,” comprehensive analysis has been lacking.

This Article begins to assess whether the Guidance has achieved its objectives by analyzing student loan litigation in bankruptcy. Our findings reveal that, 23 months after the Guidance was announced, 2,514 new student loan adversary proceedings (SLAPs) were filed—a 330% increase compared to a similar period before the Guidance—with a third of these proceedings stemming from prior bankruptcies. Despite this significant increase, we find that this still means that fewer than 1% of bankruptcy filers with student loans seek to discharge them in bankruptcy. Notably, borrowers with smaller student loan debts become more likely to seek relief, indicating the Guidance may have lowered barriers for this group. Additionally, the increase in SLAP filings is regionally concentrated, suggesting that certain courts or consumer bankruptcy attorneys are “early adopters” of the new legal regime. Case processing times were initially slower but are returning to historical levels.

Our data suggests that while the Guidance has positively impacted the willingness of borrowers to seek the discharge of their student loans once in bankruptcy, overall use of this relief remains negligible relative to the total number of bankruptcy cases, indicating that additional efforts are needed to enhance access and awareness. Until Congress amends the Bankruptcy Code by removing Section 523(a)(8), the new Guidance serves as a beacon of hope for struggling borrowers seeking relief through bankruptcy.

Keywords: student loans, bankruptcy, adversary proceeding, student debt, federal student loans, department of education