Surge in Bankruptcies as Americans Seek Relief from Student Loan Debt

A growing number of Americans are turning to bankruptcy as a means to alleviate the burden of student loan debt, according to recent data released by the Department of Justice. In the period from November through September, 632 borrowers filed for bankruptcy to eliminate their student loans, marking a significant increase from pre-pandemic levels that averaged around 480 annually.

The surge in bankruptcy filings is notable given the pandemic-era freeze on federal student loan payments, which had been in effect since March 2020. However, with the official end of the payment hiatus at the beginning of October, millions of Americans now face the resumption of monthly payments, with the average bill ranging between $200 and $299 per person, according to Federal Reserve data.

JPMorgan’s analysis estimates that collectively, borrowers will resume paying approximately $10 billion per month, posing a potential financial shock for many.

“The departments anticipate that this trend will continue,” stated the Justice Department in a news release.

This uptick in bankruptcy filings comes on the heels of the Biden administration’s introduction of a new legal pathway, making it easier for borrowers to discharge federal student loan debt in bankruptcy. The updated guidelines, announced in November 2022, aimed to streamline the process and eliminate unnecessary hurdles for borrowers seeking relief.

Previously, discharging student loan debt through bankruptcy required a higher bar compared to other types of debt. Borrowers had to demonstrate “undue hardship,” a more stringent requirement than for debts such as medical or credit card bills.

Under the new guidelines, borrowers must prove three criteria to discharge their student loan debt: lack the ability to repay the loan currently, inability to repay in the future, and having made a good-faith effort to repay.

The Justice Department noted that the data on loan discharges suggests the rule change has made it easier for eligible borrowers to achieve a bankruptcy discharge of their federal student loan debts.

“One year ago, we set out to simplify and improve the process for student loan borrowers in bankruptcy,” said Associate Attorney General Vanita Gupta. “Our one-year review indicates that our efforts have made a real difference in borrowers’ lives by ensuring student-loan discharges are more accessible to eligible borrowers.”

This policy shift aligns with President Biden’s broader efforts to reduce or eliminate student loan debt for Americans. While the Supreme Court struck down Biden’s student loan forgiveness plan earlier this year, the administration has since announced additional measures, including the erasure of $127 billion in debt owed by approximately 3.6 million borrowers. As the landscape of student loan relief evolves, the impact on bankruptcy filings and the financial stability of borrowers remains a crucial focal point.