New Guidelines Make It Easier To Discharge Student Loan Debt in Bankruptcy

Discharging Student Loans Just Got Easier

The Biden Administration recently announced new guidance for the Department of Justice for handling Federal Student Loans in Bankruptcy. This guidance will likely make it easier for Debtors in bankruptcy to discharge federal student loans.

Prior to this guidance being issued the guidelines for meeting the requirements to discharge student loans were unclear and appeared to be difficult to meet. The guidance will allow the Department of Justice to recommend to the Bankruptcy court a full or partial discharge of the student loans if the Debtor meets the applicable factors. The Department of Justice will evaluate a Debtor’s qualification for discharge using an Attestation Clause submitted by the Debtor. The factors that will be examined include the Debtor’s present, future and past financial circumstances. The Department of Justice will use the following factors to evaluate consideration of student loan discharge:

1. Assessment of Present Circumstances -A Debtor has to demonstrate a present inability to maintain “a minimal standard of living” while making student loan payments.
   • This standard can be met by a two-step process where the Department will First look at the IRS standards which can be found here: IRS Standards. Second those allowable expenses under the IRS Standards will be compared against the Debtors income and if the allowable expenses are higher than the gross income then this standard is met.
     • Expenses
       • IRS National Standards-Under this inquiry, where the Debtors expenses are below the IRS National Standards, there will be no further analysis of actual expenses and the Debtor will be given the full National Standards amount of allowable expenses. These expenses include food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous.
       • IRS Local Standards-Local standards include housing, utilities and transportation. In this category the expenses will be limited to the actual expenses and if the actual expenses do not exceed the amount provided for in local standards for location and household size, then it will be considered consistent with a minimal standard of living.
     • Income – The expenses will be compared against the Debtor’s gross household income which will include income from:
       • Employment
       • Social Security
       • Unemployment Benefits
       • Other income sources
   • Meeting “Minimal Standard of Living”– If the Debtor’s allowable expenses exceed the debtor’s income, then the minimal standard of living is met.
2. Assessment of Future Circumstances– This standard requires a showing that current inability to pay student loans and maintain a minimal standard of living is likely to persist during the repayment period of the loan.
   • Presumption – A presumption that the inability to pay will persist will be applied in the following circumstances:
     • The Debtor is age 65 or older
     • Debtor has a disability or chronic injury affecting income potential
     • Debtor has been unemployed for at least 5 of the last 10 years
     • Debtor has failed to obtain a degree for which the loan was obtained
     • The loan has been in payment status for at least 10 years
   • Although this presumption is rebuttable the guidance indicates that this will be uncommon.
3. Assessment of Good Faith– This standard requires that the Debtor demonstrate good faith with regard to repayment of student loan. The guidance indicates that if the Debtor has taken one of the following steps and in the absence of factors that contradict this good faith, the good faith standard can be demonstrated. The following steps evidence good faith:
   • Good Faith Steps
     • Making a payment
     • Applying for deferment or forbearance
     • Applying for an IDRP plan (Income Driven Repayment Plan)
     • Applying for a Federal Consolidation Loan
     • Responding to Outreach from Servicer or collector
     • Engaging meaningfully with Department of Education or their loan servicer for payment options, forbearance and deferment options, or loan consolidation or
     • Engaging meaningfully with a third party they believed would assist them in managing their student loan debt.
   • Additional or Countervailing factors can include:
     • Debtor’s efforts to maximize income and reduce expenses.
       • Handling of finances in a manner that suggest responsible managment of debt.
       • Personal or financial obligations significantly reduce their employment opportunities or increase their expenses.
     • Actual payment history and IDRP enrollment–Under the guidance a Debtor should not be disqualified if they did not meaningfully engage with the repayment process due to possible misinformation, wrongful IDRP determination, or lack of adequate information or guidance.
       • Payment history-This will be considered in the context of the debtor’s financial means and personal circumstances.
         • Failure to Repay Will Not Indicate Bad Faith -Where other factors of good faith exists including evidence the debtor lacked financial means to repay or debtor made meaningful contact with Department of Education or servicer to explore repayment options.
       • Enrollment or Non-Enrollment in IDRP
         • Non-enrollment alone does not show lack of good faith
           • Reasonable Explanations for Non-Enrollment-Guidance indicates that the Department of Justice should look for any reasonable explanation for non-enrollment which includes:
             • Denied access to IDRP; Provided inaccurate or incomplete information regarding IDRP; Had a plausible belief that IDRP would not have meaningfully improved financial situation; Unaware after reasonable engagement of the option of an IDRP and its benefits.
             • Contact with Department of Education-Where the explanations are based in part on contact or attempted contact with the Department of Education or servicers then it evidences good faith.
           • Insufficient or lack of acceptable explanation for non-enrollment can still meet good faith standard by other actions.
         • Enrollment is evidence of good faith
4. Consideration of Financial Assets– Guidance provides that Debtor’s financial assets will be considered in the analysis. Strong weight should not be given to assets that are not easily converted to cash or are critical to the debtor’s well-being.

Procedure for Discharge of Student Loan Debt

After the Debtor has filed a bankruptcy case and has commenced an adversary proceeding regarding the federal student loan debt then an Attestation Clause needs to be submitted to the Department of Justice. The Sample form can be found here: Attestation Clause

Documents to Submit to the Department of Justice include:

• Attestation Clause
• Documents Supporting Income
• Other evidence requested

The Department of Justice based on the Attestation clause and supporting documents will stipulate to facts supporting discharge and make a recommendation to the bankruptcy court.