2024 Update: New Federal Guidance on Discharging Student Loans in Bankruptcy Is Turning out To Be a Game Changer
March 7, 2024
The Justice Department, in partnership with the Department of Education, announced new guidelines in November of 2022. The new guidelines loosened the strict application of the “undue hardship” exception when defending a student loan dischargeability action. This new guidance really is a game changer. Here is a look at some of the data that backs that statement up.
Data from The Department of Justice as Of November 2023
632 cases were filed in the first 10 months of the new process (November 2022 through September 2023), a significant increase from recent years. The Justice Department and Education Department anticipate that this trend will continue.
97% of all borrowers in the cases filed are voluntarily using the new streamlined process.
The vast majority of borrowers seeking discharge have received full or partial discharges. In 99% of cases where courts have entered orders or judgments to date, the government recommended, and the court agreed to, a full discharge or partial discharge.
Two bankruptcy courts — the Northern and Central Districts of California — have adopted procedures recognizing the utility of the new process, aimed at further streamlining the procedures debtors must follow to obtain discharges.
Practically Speaking
Here in Orlando, we had our first successful outcome using the new guidelines in September 2023. We helped Alrena Dale obtain a consent judgment that wiped out $155,000.00 of her student loans. Ms. Dale attended the University of Phoenix to obtain a business master’s degree. Ms. Dale tells us that she was promised that the University of Phoenix would help her get a high-paying job. When she graduated, the school did not lift a finger to help her find a job, and she could not obtain a job utilizing her master’s degree.
We assisted her with filling out the lengthy 17-page attestation form required by the Department of Justice. Her attestation form reflected that she spends more than she earns. Although it took nine months, the government ultimately recommended the student loans be discharged. On September 6, 2023, the Honorable Judge Lori V. Vaughan of the Middle District of Florida entered the first consent judgment in the Middle District of Florida, finding the loans were discharged.
So, What Do We Think the Government Considered?
“Undue Hardship”
The federal statutes do not even define in any detail what “undue hardship” means, and the case law regarding undue hardship has developed to the point that it makes it almost impossible for judges to discharge student loans. Some call the threshold a “certainty of hopelessness.”
To make matters more complicated, before this new guidance filing an Adversary Proceeding against the Department of Education in bankruptcy court was very costly. Under the new guidance, there is no discovery, depositions, or lengthy litigation. The costs are drastically less under this new this guidance.
The Department of Justice Department Attorney Assesses “Undue Hardship?”
In the past, to qualify for a discharge based on “undue hardship” vs. ordinary hardship, most courts required that debtors meet the stringent requirements of a standard called the “Brunner Test.” The test is based on three factors: The inability to maintain a minimal standard of living for yourself or your dependents if forced to repay the loan, the unlikelihood of your current financial situation changing, and whether you have made good-faith efforts to repay the loan.
Justice Department attorneys will still use the basics of the Brunner test, but the new guidelines give more specific direction and less stringent requirements as described here:
Present ability to pay: Using IRS standards and information provided by the debtor, the Justice Department Attorney will determine whether the debtor lacks a current ability to pay the loan under its standard repayment agreement, which is ten years. Ms. Dale’s student loans were more than ten years.
Future ability to pay: A variety of factors—such as the inability to pay is likely to persist, being 65 or older, disabled, chronic injury, lack of degree, or extended repayment status (over the ten-year period)—are a part of the Justice Department attorney’s assessment of whether the debtor’s inability to pay is like to persist in the future. Ms Dale was not over 65 years of age but it seems fair to conclude that her financial circumstances will not change significantly in the future. She’ll likely only receive minimal raises in the future and typically cost of living will increase and absorb any increases in income.
Good-faith efforts: The Department will focus on objective criteria that reflect reasonable efforts to earn income, manage expenses, repay the loan, and other evidence of good-faith efforts to repay the loan. These can include contacting the loan servicer regarding payment options, such as attempting to negotiate an income-based repayment plan. The good news is that entering an income-based repayment plan is not required. Ms. Dale had stayed in contact with her student loan servicers, she entered into forbearance, and had deferred her student loans. Ms. Dale had not entered into an income driven repayment plan as she did not believe she could afford it.
The government found that Ms. Dale met all three prongs under the new guidance.
The Practical Differences We Think This New Guidance Brings
Two of the most significant practical differences are the lower cost of litigation and lower threshold for meeting the three prongs of the Brunner test. Ms. Dale for example could finally afford to hire our firm to resolve her student loans and under the new guidance she met the three prongs. Before the new process, the cost of a student loan adversary would typically run upwards to $10,000.00 in attorney’s fees and it was almost impossible to meet the three prongs. Under this new guidance the attorney’s fees are affordable and the loosening of meeting the three prongs can often be met. Although the new process still requires a lawsuit and is not easy to maneuver, the good news is that with competent counsel it can be affordable and successful.
As far as we are concerned, this new process remains a game-changer. Our local Assistant United States Attorney (“AUSA”)’s office has been a pleasure to work and learn with. It is incredibly encouraging that these student loan lawsuits can be filed at an affordable cost to debtors that deserve this relief. Ms. Dale thought she would go to her grave owing $155,000.00 in student loans. Now she can sleep at night knowing the student loans have been discharged.
We are very hopeful that our firm and others around the country can now make a difference in discharging student loans. Congress’s intent was for debtors to get a fresh start. To date, this has not been the case with student loans. We see this new process as a path forward to that goal.
Tammy Branson
Robert B. Branson
BransonLaw, PLLC
Orlando, Florida