Student Loans & Bankruptcy - New Guidance as of November 17, 2022 Helps Eliminate Student Loan Debt
Historically, student loans were only dischargeable in bankruptcy by filing a lawsuit and proving an undue hardship. Past bankruptcy court practice made such discharges very difficult to obtain and very expensive to pursue.
However, on November 17, 2022, the Education Department and Justice Department announced new policy guidance that would alter how the Justice Department handles undue hardship bankruptcy discharge requests by federal student loan borrowers. The new guidance sets “clear, transparent, and consistent expectations” for discharge, reducing burdens on debtors by simplifying the process, and increasing the number of cases in which the Education Department agrees to support a discharge. To achieve these goals, the guidance provides a more objective framework by applying the following three-part test to determine undue hardship:
Part 1 - Present Ability to Pay
Using existing standards developed by the IRS and the information provided by the debtor, the Justice Department attorney will calculate a debtor's expenses and compare those expenses to the debtor's income. If a debtor's expenses equal or exceed the debtor's income, the Justice Department will determine that the debtor lacks a present ability to pay.
Part 2 - Future Ability to Pay
The Justice Department will then assess whether the debtor's present inability to pay is likely to persist in the future. The Justice Department attorney will presume a debtor's financial circumstances are not likely to change if certain factors—such as retirement age, disability or chronic injury, protracted unemployment history, lack of degree, or extended repayment status—are present. Where such factors are not present, the Justice Department attorney will assess the facts showing whether the debtor's present inability to pay is likely to persist.
Part 3 - Good Faith Efforts
In assessing the “good faith” standard, the Justice Department will focus on objective criteria reflecting the debtor's reasonable efforts to earn income, manage expenses, and repay their loan. The Justice Department attorney will consider, for example, whether the debtor contacted the Department of Education or their loan servicer regarding payment options for their loan. A debtor will not be disqualified based on past non-payment if other evidence of good faith exists. A debtor also will not be disqualified based on their not enrolling in an income-driven repayment plan where the debtor was deterred from participating in such a plan or otherwise provides a reasonable explanation for non-enrollment.
Under the Justice Department's new guidance, debtors must still file a lawsuit, then complete an "attestation form" to assist the government in assessing the discharge request. The Justice Department, in consultation with the Department of Education, will review the information provided, apply the factors that courts consider relevant to the undue-hardship inquiry, and determine whether to recommend discharge. Even where the applicable factors may not support a complete discharge, where appropriate, the Justice Department will consider supporting a partial discharge.
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