Student loan forgiveness has been in the news for the past few years now. Opinions vary as to whether wholesale forgiveness is appropriate or not. All this talk of student loans has not been lost on the U.S. Justice Department. In November 2022, the DOJ implemented new guidance on how it will handle student loan discharges in bankruptcy.
Prior to this new guidance, borrowers were required to meet the so-called “Brunner Test”. Under this test, debtors needed to show that they couldn’t maintain a minimal standard of living if required to repay their student loans; their circumstances were not likely to change while in the repayment period; and they made a good faith effort to repay their student loans. This standard made it virtually impossible to have student loans discharged in bankruptcy. Very few debtors (and their attorneys) even attempted to receive a student loan discharge.
This new guidance has changed everything. Under this guidance, upon the filing of the bankruptcy, debtors submit an “attestation form” with the U.S. Attorney in the district the bankruptcy was filed in. The U.S. Attorney will review the attestations on an individual basis to determine if a bankruptcy discharge is appropriate. Not only is this process fairer, but it also leads to more consistent results.
The DOJ recently published its’ findings after year one. During the first ten months of this guidance, 632 adversary proceedings were filed seeking student loan discharge. This is a significant increase compared to prior years. 97% of those filers are using this new streamlined process. Most of those debtors are being granted some form of relief. In 99% of the cases to date, where the bankruptcy court has issued an order or judgment, the DOJ recommended either a full or partial discharge. These findings speak for themselves. Struggling debtors are receiving help in the form of a full or partial discharge of their student loans.
A few things to keep in mind if you are considering taking advantage of this new guidance. First, remember this guidance ONLY applies to federal student loans. Next, how old are you? How long have you been repaying your student loans? Are you disabled? Do you have some medical condition that impacts your income potential? Did you complete your degree? These are the considerations demonstrating a future inability to repay your student loans. Additionally, what efforts have you made to repay your student loans? Did you apply for a forbearance or deferment? Have you taken advantage of the “income based” repayment options? These questions are considerations regarding your prior efforts to repay your student loans.
This new guidance makes it easier to have your student loans discharged in bankruptcy, but it does not make it easy. If you have federal student loans, it should be considered in the broader context of filing bankruptcy. So, when meeting with a bankruptcy attorney, you should have a breakdown of all your federal student loans. You can get a printout from the National Student Load Data System (www.nlsds.ed.gov). Then be prepared to answer the questions listed previously. If you would like to discuss the possibility of having your federal student loans discharged, please feel free to contact me.