A SEISMIC CHANGE IN THE TREATMENT OF STUDENT LOANS IN BANKRUPTCY
The guidance from the Department of Justice regarding the treatment of student loans in bankruptcy is clear. In cases where discharge is appropriate based on the updated guidelines, the Department of Justice attorney:
should stipulate to facts necessary to demonstrate undue hardship and recommend discharge where the debtor provides information in the Attestation (or otherwise during the adversary proceeding) that satisfies the elements of the analysis below.
Student Loans in Bankruptcy
For decades, consumer debt advocates have sought changes in the Bankruptcy Code related to student loans. Student loans are notoriously difficult and, in many people’s opinions, impossible to discharge in bankruptcy. This is primarily because the Department of Education backs most of the loans.
Before the recently updated guidance, United States Attorneys contesting the discharge easily prevailed by showing that the level of undue hardship indicated by case law is extraordinarily rare. New guidance objectively reviews undue hardship, with the realities of our economy at the forefront. Demonstrating undue hardship is no longer as invasive or tone-deaf as before.
Discharging Student Loan Debt
Going forward, if you are thinking of filing for bankruptcy and you want to include discharging your student loan debt, a part of that process will be what is known as an “adversary proceeding.” The Department of Justice guidelines pertain to what stipulations can be made to streamline these proceedings.
This process now begins with filling out an Attestation. This allows the Department of Justice to analyze student loans based on affordability. In a monumental perspective shift, it now considers whether the standard repayment was unaffordable for a ten-year period. If so, a presumption could be made that there is a future inability to pay.
Debt Review Process
The Attestation reviews the debtor’s income, expenses and objective lifestyle. For example, if you rely on family now because you cannot afford a babysitter, it is considered in the review for reasonable expenses. This is among the circumstances that were previously disregarded. The Department of Justice guidance provides good context and liberal handling of each case. Although the guidelines are clear that they will still review each claim for bad faith filing, they are sensitive to the realities of many Americans who cannot pay for circumstances arising due to the COVID-19 pandemic.
Questions About Student Loans in Bankruptcy
It is unclear whether you may reopen pending bankruptcy cases and closed cases. Over time, there will likely be more cases that occur and based on those rulings; you may be able to proceed. What is clear is that Chapter 7 cases will not be treated differently than Chapter 13. Please review my bankruptcy page for more information regarding which filing is right for you.
Note that these guidelines are specific to Department of Education backed loans, or public student loans. Service will be required on the Department of Justice, Assistant United States Attorney for individuals seeking this relief.
Student Loan Discharge Assessment
A three-pronged analysis helps determine if student loans should be discharged. The new Department of Justice guidelines clarify the application of these three prongs. The U.S. Attorney will be mindful of these guidelines; their goal is to help people who cannot afford their student loan debt due to undue hardship.
Please note that the application of the following guidelines is optional for United States Bankruptcy Judges, and some U.S. Attorneys may not use these guidelines in every case.
Assessment of Present Circumstances (Debtor Income)
Much like the means test, it analyzes the debtor's actual standard of living. This assessment is much more reasonable than before. e.g., The debtor does not have to have the bare minimum living accommodations. Previously the creditor attorney would conduct discovery on the debtor's life. If the debtor went to average restaurants or had updated technology or furniture, for example, it could have been used against them. Today's guidelines are more helpful because they encourage a less embarrassing inquiry into a debtor's life.
Assessment of Present Circumstance (Persistent Hardship)
This portion of the analysis determines whether the debtor's hardship will persist into the future and is a rebuttable presumption. The guidance provides objective standards that create a rebuttable presumption that debt should be discharged. If the debtor meets the following criteria, there is a rebuttable presumption that the loans should be discharged:
- 65 years or older
- Failed to obtain the degree
- Has been in repayment status for 10 years
- Could not pay the entire student loan
Assessment of Good Faith
The good faith prong tends to analyze if the debtor is abusing the system, such as filing after recently obtaining a degree without trying to get a job, for example. The Department of Justice flags flagrant abuses of the system as bad faith filings.
New Jersey Student Loan Lawyer
If you or someone you know would like to discuss the options for student loan debt relief, including bankruptcy, please contact A. Brown Esq. LLC for a consultation.