- Nikki Hashemi
Student Loan Discharge in Bankruptcy Easier Now?
When a debtor mentions student loan debt at their initial bankruptcy consultation, most bankruptcy lawyers quickly remind them that student loans are not dischargeable, unless you want to attempt an adversary proceeding to prove undue hardship, which is a very high standard to overcome.
Most debtors quickly drop their heads acknowledging that their student loans would not be wiped out, and the consultation focuses on the rest of their consumer debt.
Student Loans Are Treated Differently
Student loans are treated differently in the federal bankruptcy code than any other kind of consumer debt.
Typically, most forms of consumer debt, such as medical bills, credit card debt, or other unsecured debt are automatically discharged upon the completion of a bankruptcy case, as long as all the requirements of the bankruptcy are complied with.
However, to discharge student loan debt, borrowers have to prove 'undue hardship' separately in an adversary proceeding, which is essentially a lawsuit in bankruptcy court, by jumping through rigorous tests and standards.
The federal government and other student loan lenders routinely use their stronger resources to oppose the borrowers in the adversary proceeding, making it difficult for borrowers to win, or to even consider trying.
New Policy Guidance to Prove Undue Hardship for Student Loan Discharge
Last fall, the Biden administration unveiled a new policy guideline* that is meant to change how the federal government handles 'undue hardship' in bankruptcy cases.
Under the new policy, the Education Department and Justice Department receive the borrower's financial situation as provided on a federal attestation form.
The officials then determine whether the undue hardship standard is met, and if so, they will not oppose a borrower seeking discharge of their federal student loans through the bankruptcy proceeding. This makes it much more likely for a Bankruptcy Judge to approve the discharge if it is unopposed in the adversary proceeding.
New Policy Guidance Goals Sound Promising
Three main goals have been stated by the Education and Justice Departments in the new policy guidance:
Consistent expectations of discharge set for all debtors, regardless of representation;
Reduction of debtors' burdens in pursuing an adversary proceeding by simplifying the fact-gathering process;
Increase in number of cases where the government stipulates to the facts, if so supported, showing that the student loan debt would impose an undue hardship and recommend discharge.
The policy change does not change the undue hardship legal standard for student loan bankruptcy cases, nor does it allow the borrower to avoid the adversary proceeding, however it seeks to simplify the process and lead to a favorable outcome for the debtor if the facts so allow.
The three conditions that must be satisfied for a debtor's student loan debt to be discharged are as follows:
The debtor presently lacks an ability to repay the loan;
Debtor's inability to pay the loan is likely to persist in the future; and
The debtor has acted in good faith in the past in attempting to repay the loan.
Present Circumstances
In determining debtor's ability to presently repay the student loan debt, the debtor's expenses are assessed in comparison to IRS Standards, with an opportunity to explain any expenses that exceed such standard amounts. These additional expenses may include court-ordered alimony and child support, day care, or preschool costs so long as they are necessary and reasonable. Furthermore, if for example the debtor is currently living with family and not paying rent, they may identify that this would not be indefinite and that a projected rent expense is expected.
These expenses are then compared to debtor's income from all sources, including Social Security benefits, and unemployment benefits, to see if the expenses do in fact exceed income.
Future Circumstances
In certain circumstances, the debtor's inability to repay debt will be presumed, such as:
Debtor is 65 year or older
Debtor is disabled or has a chronic injury
Debtor has been unemployed for at least 5 of the last 10 years
Debtor has failed to get the degree for which the loan was obtained
The loan has been in payment status other than 'in-school' for at least ten years.
Good Faith Assessment
Numerous steps are outlined in the new policy guidance that are evidence of good faith by the debtor to try to repay the student loan debt.
These steps include making payments, applying for federal consolidation loans, applying for deferment or forbearance, and efforts to increase income and minimize expenses, among others.
Debtor's Assets Considered
The undue hardship analysis also takes into account all of debtor's assets, but is careful under the new guidance to consider whether the assets are easily convertible to cash, and/or whether they are necessary for the debtor's minimal standard of living.
Ultimately, the goal is for the eligible debtor who can prove all facts necessary to obtain a full or at a minimum a partial discharge of their student loan debt, together with the discharge of the rest of their consumer debt in a Chapter 7 Bankruptcy.
This new guidance now gives us bankruptcy lawyers the opportunity to do a thorough examination of a debtor's financial situation when student loans are involved. If a debtor qualifies for a Chapter 7 discharge and has student loan debt, it is imperative for bankruptcy lawyers to dig deeper and see if a student loan discharge may also be possible for them.
*All references to the new policy guideline of simplifying the student loan discharge assessment are obtained from "Guidance For Department Attorneys Regarding Student Loan Bankruptcy Litigation", https://www.justice.gov/civil/page/file/1552681/download November 17, 2022.
At Interplay Legal Solutions Inc., Attorney Nikki Hashemi has an empathetic hands-on approach with all her bankruptcy clients, ensuring that thorough pre-filing assessments are made, and that the debtor is fully aware of all other debt relief alternatives prior to filing a bankruptcy petition.