Bankruptcy and student loans: why it's easier now to wipe out that debt

Student loan debt in the United States totals $1.745 trillion. That's not a typo. And almost all of it ($1.617 trillion) is the federal loan balance - which accounts for 92.7% ofay ll student loan debt. Almost 43 million Americans have federal student loan debt for an average of $37,787 owed. 

All of these numbers, courtesy of, show the scope of the crippling debt that Americans are living with and trying to pay off. For context, in 2006, the total amount owed was $520 billion - which means that the amount of debt has more than tripled in the past 15 years.  

For the past 45 years, it's been virtually impossible to get protection from that debt when filing for bankruptcy protection. That's all changing thanks to a move by President Joe Biden.

On Nov. 18, the Biden Administration announced a policy change to make it easier for borrowers to discharge that debt in bankruptcy.

Attorney Michael Jaafar specializes in helping people tackle their debt and navigate bankruptcy and answered some important questions while dispelling some myths about bankruptcy.

What is bankruptcy?

The term bankruptcy has negative connotation. Think about the game Monopoly - going bankrupt will virtually end your game. Jaafar said the idea that filing for bankruptcy will make your life harder isn't true.

"The reason people don't file bankruptcy is because of some very common myths. Those myths stop people from taking relief they should be taking," he said.

Jaafar said to look no further than the companies that you owe money to - many of them have filed for bankruptcy protection. 

The other myth is that it will destroy your credit and it make it harder to buy a house or car in the future. 

"People who file for bankruptcy get cars all the time. They're eligible to buy a home all the time," Jaafar said. "If you file for bankruptcy, you wipe out your credit history."

And that could actually be a good thing.

Consider this example: 

  • Person A has 4 kids, a job that pays $80,000 per year, credit card balances, and other debts
  • Person B has 4 kids, a job that pays $80,000 per year and filed for bankruptcy 18 months ago with no other debts outstanding

Jaafar says Person B is a safer option for the car dealer because they have no other debts hanging around which could be garnished. Therefore, he says, they're more likely to pay off and, if necessary, the dealer would be ‘first in line’ to garnish their wages to pay the debt. 

Why it's so hard to discharge student loan debt in bankruptcy 

So - that's what to know about bankruptcy and why it's not the end of the road. But why aren't student loans broadly covered?

Jaafar explains that the 1978 law that was passed to allow for bankruptcy protection did so - but it also made it difficult for people to wipe out that student loan debt. By the late 90s, it was so hard that most people gave up.  He said fewer than 1% of people who file for bankruptcy seek protection from their student loans as well. And it almost always fails. 

According to Jaafar this is because of cases, laws, and the Department of Education making it harder and harder to seek out protection

"Technically, you could always wipe out your student loans. But less than 1% of people even tried," Jaafar said. "It was so hard, they would have served as an example to others for reasons not to do it."

What did the Biden Administration change?

Jaafar said the move by the Biden Administration streamlined the process with new policy guidance to handle undue hardships 

According to Jaafar, when you file for bankruptcy now with student loans, if you're eligible, you won't get an avalanche of blockages from Department of Education. In other words, they're streamlining the process and will no longer try to slow you down from being covered.

"I would say the overwhelming majority of people who are behind on their student loans who are eligible for this relief, will get relief," Jaafar said.

So who qualifies, Jaafar said inthe past five years, a quarter of a million people who filed for bankruptcy would have otherwise been eligible to wipe out the debt in this way.

What to do you if you want to file for bankruptcy

Don't be scared. That's Jaafar's advice. Pick up the phone and call a local attorney for a free consultation. Ask your friends or family or neighbors - and be open to what the attorney you speak with will have to say.

Get their advice - and then call someone else for another opinion before making your decision.

If you qualify, you immediately are protected from garnishments.