Student Loan Collections Are Poised to Test Bankruptcy Options

The Education Department’s move to resume collections on millions of student loans after a five-year pause sets the stage to drive a new wave of bankruptcy filings and test little-used government guidance on discharging those debts.

Getting rid of student loan debt in bankruptcy is difficult, but it’s not outright prohibited. Only .01% of student loans in bankruptcy were discharged as of 2022, according to legal services firm Stretto.

Filing for bankruptcy would provide borrowers facing wage, Social Security, and tax refund seizures an automatic stay, giving them breathing room to explore repayment options or pursue student loan discharge through the “attestation” process introduced by the Education and Justice departments in 2022.

The restart of student loan collection occurs as Chapter 13 filings are beginning to rise after a decline due to federal aid and forbearance during the pandemic. More than 5 million borrowers haven’t made monthly payments in over a year, according to the Education Department.

“Millions live paycheck to paycheck, and once something external happens, like a job loss or wage garnishment, that’s often the precipitating factor to file bankruptcy,” said Scott Barna, president of Stretto, which has a student loan debt platform for attorneys and borrowers.

The Biden administration paused student loan payments and interest for years after the Covid-19 pandemic, but courts have repeatedly blocked efforts to cancel debt. Borrowers on the Saving on a Valuable Education plan, known as SAVE, remain in limbo amid a pending legal challenge.

The years-long forbearance and prospects of debt forgiveness meant that “borrowers weren’t acclimated to paying,” Barna said.

Michael Hunter, head of Epiq’s bankruptcy analytics, said garnishment will worsen financial strain, particularly for borrowers with high default rates. Currently, 4 million borrowers are in late-stage delinquency, and the number could increase to 10 million in default within the coming months, according to the Education Department.

Those dynamics are likely to drive a 20-30% increase in overall bankruptcy filings in 2025, Hunter said. Those cases would build on the 517,308 cases filed in 2024, a 14.2% rise from 2023.

Borrowers from for-profit colleges account for 70% of defaults and are more likely to file, Hunter said.

Bankruptcy as a Recourse

The government process introduced over two years ago is designed to help borrowers completely or partially discharge their student loan debt.

However, many borrowers and attorneys still believe that student loans can’t be discharged in bankruptcy and are unaware of the guidance issued in 2022, Barna said.

Unlike other consumer debts, student loans require borrowers to prove “undue hardship”—often a tough standard. The new guidance sought to lower the bar.

“There will be a lot more education and awareness that bankruptcy is a recourse for student loan debt,” he said.

The procedure aims to evaluate hardship based on current and future financial circumstances, as well as past good-faith repayment efforts, and requires an “attestation” form to be filed with the bankruptcy court.

The Education and Justice departments didn’t provide recent data on discharges in response to questions from Bloomberg Law. However, around 85% of student loan proceedings have resulted in full or partial discharge since the 2022 guidance was issued, according to an October 2024 letter from Democratic Sens. Elizabeth Warren (Mass.), Dick Durbin (Ill.), and others.

Nationwide student loan proceedings tracked by Stretto increased nearly sixfold to 164 in January 2025 from 28 in January 2023.

Playing Chess

Borrowers considering bankruptcy need to understand how student loans fit in, said Joshua Cohen, a practitioner known as “The Student Loan Lawyer.”

“Bankruptcy might be a good thing, because if it works, you’re getting rid of all or part of your debt. But what is bankruptcy going to do for your student loans? Are you doing it to buy time or for a discharge?” he said.

Student loan discharge decisions take roughly seven and a half months on average, according to Stretto data.

Cohen said he has been able to receive partial discharges for clients, and in his experience, the procedure has been effective for older and low-income individuals.

Still, Cohen recommended borrowers prioritize getting out of default to avoid garnishment. That can be achieved by consolidating loans or enrolling in loan rehabilitation, which requires borrowers to make a set number of consecutive, on-time payments to loan holders under an agreement.

Once the garnishment begins, borrowers won’t be able to consolidate and will have to undergo rehabilitation, he said. Another potential use of bankruptcy is to stop garnishing and seek consolidation.

“It’s a little bit like playing chess,” Cohen said. “Which rule are you doing so that you can get to the best position at the end of the game?”

Buying Time

Michelle Bass, the consumer bankruptcy practice lead at Wolfson Bolton Kochis PLLC, said student loan borrowers who file Chapter 13 bankruptcy will enjoy a period of three to five years of the automatic stay halting student loan debt collections, though they must commit to repaying other unsecured debts for this period.

They also need to consider the amount of their non-dischargeable student loan debt and interest rates, as student loans could continue to accrue interest throughout the stay.

“Many student loan borrowers-turned-Chapter 13 debtors could potentially end up in a worse-off position than they were in at the start of their individual reorganization plans,” Bass said.

In many cases, existing income-driven repayment plans would be the best alternative, including for those who can’t afford the cost of bankruptcy.

“Bankruptcy is a band-aid if you don’t do anything about the student loan,” Cohen said. “They come out of bankruptcy, the garnishment starts again.”