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2023 Guidance on Discharging Student Loans

July 14, 2023

Recent Updates to Guidance on Discharging Student Loans in Bankruptcy May Greatly Improve Chances of Success

Are you still paying off student loans years after signing the dotted line for the loan? Are you unable to pay other bills or enjoy a minimal living standard due to crushing student debt? Is paying off your loan creating undue hardship? You may qualify for relief.

Generally, student loans have not been dischargeable in bankruptcy except in cases of extreme “undue hardship.” The standard for proving undue hardship was so high in the past that many debtors did not even bother to try. However, in November 2022, the U.S. Department of Justice (DOJ) issued new guidance regarding discharging federal student loan debt in bankruptcy in cooperation with the U.S. Department of Education (DOE)

New Attestation Form Creates a Complete Financial Picture

The new guidelines have simplified the process for the Department of Education to decide whether or not to agree that the loans should be discharged for undue hardship. To be clear, the law hasn’t changed but the way the Department of Justice and the Department of Education deal with discharging student loans in bankruptcy has.

One of the most important features of the new guidelines is a debtor-completed attestation form that provides an in-depth look at the debtor’s budget and ability to pay the loans. The new guidelines take a more realistic view of the debtor’s financial picture based on IRS standards and situations that may impact the debtor’s earning potential, the debtor’s expenses compared to local and national standards, their attempts to repay the debt, and other factors, such as future expenses the debtor hasn’t been able to afford because of their current financial situation. This change is a big deal because, typically, most of these items were harshly scrutinized and future expenses weren’t considered.

Scenario: How The New Guidelines Might Play out In the Real World

The DOJ issued a sample debtor scenario using the new guidance that knocked our boots off.

The student debtor in the sample scenario was a fictional debtor named Jane Smith, a Baltimore County, Maryland resident. The scenario considers Jane’s personal information, present ability to pay, future circumstances, prior efforts to repay loans, and her assets.

Background of Sample Debtor: Jane is 30 and has a 10-year-old daughter. Jane filed for bankruptcy and is attempting to discharge her student debt because of undue hardship. She listed a student loan balance of approximately $26,000 incurred while pursuing a nursing degree at John Doe Community College. However, she left school in 2010 without completing her degree. Her loan has been in default since June 2012. She currently works as a nursing assistant at Baltimore County Hospital.

Differences that Stand out In Department of Justice’s Sample vs. How We Have Seen the Three-Prong Brunner Test Applied

Up until the new DOJ guidelines were issued, the standard for determining undue hardship was the three-prong Brunner test, which was based on three criteria:

  • Present ability to repay the loans and still maintain a minimal standard of living for the borrower and the borrower’s dependents

  • Future ability to repay the loans

  • Prior good faith efforts to repay the loans

These three prongs may sound simple enough to prove, but in the real world, it was exceedingly difficult to prove undue hardship using the Brunner test. The Brunner test is also called the “certainty of hopelessness” test. This new process does give us hope for success.

Here’s how we think the new guidance loosens the approach the DOE will take:

I. Present Ability to Pay: Jane reports a monthly income of $3,900, with total monthly expenses of $3,782. The DOJ attorney compares Jane’s income and expenses with her most recent tax return and IRS standards. After considering her payroll deductions and the IRS standards for allowable expenses, the DOJ attorney determines that her expenses, including additional housing costs, amount to $4,582, exceeds her income.

In the past, the Department of Education would often defend the adversary lawsuit by scrutinizing each expense the debtor has and stressing that the debtor could afford to enter into a low- or sometimes zero-income driven repayment plan based on her family household size and income.

II. Future Ability to Pay: Jane Smith attests that her student loan went into repayment more than 10 years ago. The provided information in her attestation does not indicate any likely change in her financial circumstances due to factors such as she left nursing school to care for her infant child, the absence of employment opportunities as a nurse without a degree, lack of significant raises or promotions in her current job, and limited job options, such as a second job, due to her daughter’s age and asthma. All these factors support the conclusion that she will remain unable to repay the loan.

What really stood out about the future ability to pay is how old the sample debtor is. A 30-year debtor has their whole life ahead, and no one knows the debtor’s future earning ability. We read a case where a debtor in her late 60s was denied discharging her student loans because she was still working and could afford a minimal student loan payment. This second prong regarding the future ability to pay was almost impossible to overcome. The new guidance seems to lean on how old the loans are and whether the debtor benefited from the education. The guidance also shows age might not be as big of a factor as it has been in the past.

III: Prior Good Faith Efforts to Repay Loans: Ms. Smith made no payments on her loans and did not enter into an income-driven repayment. The sample scenario explains that she couldn’t afford to provide for her daughter and maintain payments. Additionally, she was concerned about potential tax ramifications if she entered an income-driven repayment (IDRP).

Even though Jane did not make any payments, the DOJ found she had made good-faith efforts to repay because she had maximized her income by obtaining full-time employment, minimized expenses, and expressed her willingness to explore IDRPs even if she didn’t go forward with an IDRP. Her failure to enroll in an IDRP was justified by the lack of guidance from her loan servicer and concerns about potential tax consequences. We were really surprised by this. Most often to overcome this prong, the debtor had to show payments were made. Jane made zero payments on her loans.

So, What Is the Process for Discharging Student Debt in Bankruptcy?

First, you must file for bankruptcy. The announcement by the Department of Justice only applies to bankruptcy cases open or filed on November 17, 2022. After a person files for bankruptcy, a separate lawsuit is filed inside the bankruptcy. That separate lawsuit, called an “adversary proceeding,” requests the bankruptcy court to determine that paying the loan would create an undue hardship on the debtor and the debtor’s dependents. Under this new guidance, the debtor seeks consent from the Department of Education to discharge the student loans.

The next step is to provide the Department of Justice with the attestation form that includes personal information regarding income, withholdings, secured debt payments, and assets; along with income documentation.

If the Department of Justice, in conference with the Department of Education, determines that the debtor meets the new guidelines, a recommendation will be made for a discharge or partial discharge of the debtor’s student loans. Although the court has the final say on whether the loans are discharged or not, we don’t see any reason why a bankruptcy judge would not approve a mutually agreed discharge or partial discharge.

This New Guidance by The Department of Justice for Discharging Student Debt in Bankruptcy Is a Game Changer

The way the Department of Education dealt with discharging student debt in bankruptcy has been too hard for too long. As we mentioned earlier in the article, although the law regarding undue hardship has not changed, the policies and guidelines the Department of Education and the Department of Justice use for determining hardship have. We believe this new process will finally give student loan borrowers that cannot afford to pay their student loans relief that wasn’t available for over twenty years. It’s still a steep hill to climb. Having competent, experienced legal help is critical to the process.

BransonLaw Can Help

We strongly suggest that you contact us at BransonLaw if you are considering bankruptcy and attempting to discharge student debt. Our team of experienced bankruptcy attorneys can guide you through the process, file the lawsuit and any necessary paperwork, and protect your interests in court. Don’t delay; contact us now. We are ready to help you.