The Department of Justice (the agency that oversees bankruptcy administration) has recently released new guidance making it more likely that federal student loan debt can be discharged in bankruptcy. This guidance was issued in conjunction with the US Department of Education.
Since the 1970s, Bankruptcy courts have treated student loan debt differently than other kinds of debt (like medical bills, credit cards, etc.). Historically, debtors seeking to discharge their student loan debt had to file additional and separate pleadings with the Bankruptcy Court, asking the Court to issue a legal decision to discharge that debt. The debtor was required to prove, to the satisfaction of the Court, that their student loans caused a level of “undue hardship” sufficient to justify erasing the debt.
When conducting the undue hardship analysis, the Bankruptcy Courts reviewed the totality of the debtor’s past, present, and future financial circumstances. The vast majority of debtors seeking relief from the Courts could not (under the then existing legal standards) meet the requirements of proving an “undue hardship” – causing the Bankruptcy Court to refuse to issue an order discharging the student loan debt.
With the recent guidance issued by the US Department of Justice, student loan borrowers must still show that paying off student debt would cause them "undue hardship" – and still must file separate paperwork with the Bankruptcy Court to do so. However, the federal government has now put a mechanism in place streamlining the debtor’s obligations and burden of proof, potentially leading to the government consenting to the debtor’s request to discharge student loan debt.
The debtor may now complete and submit to the US Department of Education a 15-page 'ATTESTATION IN SUPPORT OF REQUEST FOR STIPULATION CONCEDING DISCHARGEABILITY OF STUDENT LOANS' form containing the debtor’s financial information. The Department of Education will review the information provided, using the new guidelines to determine what qualifies as "undue hardship". If the information provided by the debtor meets the new “undue hardship” threshold, thereby justifying the discharge of that debt, the Department of Justice attorneys (who represent the Department of Education in Bankruptcy Court) can then recommend to the Bankruptcy Judge that the debtor’s federal student loan debt be discharged.
While the new guidance certainly streamlines the path to federal student loan debt dischargeability, there still exists the burden on the debtor to prove their financial worthiness to obtain such a discharge. The debtor must still collect information that is not required for the discharge of other debts and submit a filing with the bankruptcy court so that the case for discharge can be considered.
The discharge of student loans under this new guidance is not guaranteed.
However, the recent political climate suggests a willingness to allow a greater likelihood of the discharge of federal student loans than at any time in the past. This appears to be good news for those debtors seeking to have substantial federal student loan debt erased through their bankruptcy filing.
The first reality check regarding this new student loan discharge guidance is that it still requires the debtor to begin the bankruptcy filing process BEFORE knowing if the Department of Education will grant the designation of "undue hardship".
Once the student debtor files the bankruptcy case, that debtor then files an adversary complaint with the Bankruptcy Court, suing the Department of Education for a discharge of the debt. The debtor then files the 15 page Attestation form with the U.S. Department of Education. They review it, and depending on what they see, can reach agreement with the debtor to discharge the debt. But this agreement to discharge is not binding on the U.S. Department of Justice -- which represents the government in the debtor's adversary case -- nor is it binding on the Courts.
It is likely that the Biden administration is bringing pressure on the U.S. Department of Justice to agree to drop their objections to dischargeabilty of student loan debt if the Department of Education has agreed to it. And if the Department of Justice has no objection, most Bankruptcy Court judges likely will go along with the guidance and enter an order of discharge.
But much of this process may be political smoke and mirrors. Certainly, Joe Biden is applying executive pressure on certain federal agencies (Department of Justice and Education) to accomplish his political objective, i.e. get as much student loan debt discharged via the Bankruptcy courts (since he was unable to garner sufficient votes in Congress to have this type of debt discharged by passage of a law). However, if the next US President is Republican, he can apply different pressures - and even undo this administrative directive and return the process to the way it was, if he so chooses.
Bottom line: if your personal financial situation is beyond repair and student debt is a significant issue, filing sooner rather than later may be wise.
Be advised: this guidance on student loan debt discharges currently applies only to Direct Loans and other loans held by the Department of Education. The guidance does not apply to loans held by guarantors, nor to Perkins Loans still held by the school. The guidance also does not apply to holders of private student loans.
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