Senate lawmaker Durbin plans to make student loan debt dischargeable during bankruptcy proceedings
In the wake of the COVID-19 pandemic, the economic impact on individuals, including students with loans, has been significant. One of the measures taken to alleviate this burden is the C.A.R.E.S. Act, a comprehensive legislation passed by the United States Congress in March 2020, worth $2 trillion. However, the specifics of how the C.A.R.E.S. Act supports students with loans during the pandemic are not discussed in this article.
Before the C.A.R.E.S. Act, companies seeking capital for business needs had two primary options: equity financing and debt financing. Equity financing, unlike debt financing, has no fixed repayment schedule or interest rates. Companies that opt for equity financing trade a portion of their ownership for capital, thus diluting their equity.
Current U.S. bankruptcy law makes discharging student loans very difficult. Student loans are considered non-dischargeable unless the borrower proves "undue hardship." This requires filing for bankruptcy (Chapter 7 or 13) and then pursuing a separate adversary proceeding to request discharge of the student loans, a process that can take many months due to administrative delays.
Recent 2022 guidance from the Department of Justice (DOJ) and the Department of Education has simplified the process somewhat by introducing an Attestation Form that borrowers can submit to demonstrate undue hardship. This new standard uses IRS Collection Financial Standards to assess the borrower’s ability to pay while maintaining a minimal standard of living, considering factors like age (65+), disability, unemployment over five years, or not completing a degree after borrowing.
Despite these changes making discharge somewhat easier, successful student loan bankruptcy discharges remain rare due to the stringent "undue hardship" requirement, traditionally demonstrated by tests such as the Brunner test.
To address this, there are proposals to reform student loan bankruptcy laws. For example, the Student Loan Bankruptcy Improvement Act of 2025 (H.R. 4444) seeks to create a more equitable and accessible standard for discharge. This bill acknowledges the existing undue hardship test is outdated and too strict, and aims to help the rising number of borrowers struggling with repayment by reducing legal burdens and expanding access to discharge.
In summary:
| Aspect | Current Law | Recent Changes | Proposed Reform (2025 Bill) | |--------------------------------|----------------------------------------------|------------------------------------------------|-----------------------------------------------| | Discharge standard | Must prove "undue hardship" (very strict) | New DOJ/ED guidance with Attestation Form | More equitable, less strict standard | | Process | Bankruptcy + adversary proceeding (long delay) | Simplified attestation; judge guided by DOJ/ED | Simplified process, reduced documentation | | Basis for hardship | Brunner test or similar | IRS financial standards + special conditions | Updated hardship test, better access | | Probability of success | Very low (~0.01% discharge rate) | Somewhat easier but still challenging | Expected to increase ease and success rate |
Thus, while discharging student loans through bankruptcy remains difficult under current law, recent administrative changes ease the process somewhat, and legislation like the Student Loan Bankruptcy Improvement Act of 2025 aims to significantly improve discharge accessibility for future debtors.
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In light of ongoing discussions about student loan bankruptcy, the 2025 Student Loan Bankruptcy Improvement Act (H.R. 4444) proposes reforming existing laws to provide a more equitable and accessible standard for discharge, acknowledging the current undue hardship test as outdated and too restrictive. To stay updated on this important topic and related general news, follow platforms like Facebook, Messenger, Twitter, Pinterest, LinkedIn, Whatsapp, and Email.
