Student debt discharge in bankruptcy now easier

Advocate hails new Biden rule as ‘game changer’ for process that previously was opaque, unlikely to succeed

Alista Lineburg is not a lawyer, but she assumed the role when she couldn’t find one to help her discharge $146,000 of federal student debt in bankruptcy. The process requires a separate lawsuit against the government, something that many lawyers refuse to take on given the time, expense and difficulty of winning.

Lineburg, 49, knows this all too well. Even when the bankruptcy court tried to assign her counsel, there were no takers. “The attorney called, and she said, ‘You can’t win this,’ ” Lineburg recalled. So she pressed on, alone.

And despite the odds, she won her case.

“I feel like I can finally get ahead,” said Lineburg.

Unlike credit card, medical and other consumer debts, student loans don’t automatically disappear in bankruptcy. Debtors need to take an extra legal step — both challenging and costly — known as an adversary proceeding.

But more people in bankruptcy are beginning to use a legal process introduced in November by the Biden administration that is supposed to make the ordeal easier, fairer and more transparent by establishing clearer legal standards and allowing debtors to present their case on a simplified form.

Lineburg started her proceeding last summer and may have benefited when the new legal pathway was introduced in the fall.

“This is a game changer,” said Latife Neu, a bankruptcy and student loan lawyer in Seattle who has successfully used the new pathway on behalf of clients. “This is a tool that has been missing from my toolbox for the entirety of my career. The new process is less risky and less expensive. We can project whether the borrower has a good chance of success before the case is ever filed.”

The long-standing position of prior administrations has been to fight nearly every case in which a borrower was seeking to discharge their debt. The Department of Justice hasn’t entirely backed down, but in coordination with the Education Department, it has provided guidelines to its army of government lawyers on which circumstances would permit a discharge to debtors, who can now detail their financial situation on a 15-page attestation form.

More student debtors in bankruptcy may be motivated to try, now that the White House’s plan to cancel up to $20,000 in federal debt has been derailed by the Supreme Court, and federal loan payments will come due again after a three-year pause.