Student loans are one of the most common and burdensome types of debt in the United States. According to the Federal Reserve, Americans owe over $1.7 trillion in student loans as of June 2021. Many borrowers struggle to repay their loans due to low income, high-interest rates, or unexpected life events. Some may wonder if they can get rid of their student loans by filing for bankruptcy.
The answer is yes, but it is not easy. Student loans are not automatically discharged in a standard bankruptcy proceeding. To discharge student loans, borrowers have to file a separate lawsuit within their Chapter 7 or Chapter 13 bankruptcy case. The borrower must prove that repaying the loans would cause them undue hardship. This is a high standard. It requires showing that the borrower cannot maintain a minimal standard of living, that the situation is likely to persist, and that the borrower has made good faith efforts to repay the loans. This is litigation, so the additional legal fees can get very expensive.
However, some good news exists for borrowers who want to discharge their student loans in bankruptcy. In December 2022, the Department of Justice (DOJ) and the Department of Education (ED) issued new guidance to make the process more consistent. The guidance provides a more objective framework for applying the undue hardship test and encourages settlement between the parties. The guidance also introduces a new attestation form that borrowers can use to seek the DOJ’s agreement to discharge their loans without going to trial.
What is the new guidance and how does it work?
The new guidance is a document that outlines the policies and procedures when evaluating requests for student loan discharge in bankruptcy. The guidance is based on the three-part test most courts use to determine undue hardship, known as the Brunner test. The Brunner test requires the borrower to show that:
- They cannot repay the student loans while maintaining a minimal standard of living for themselves and their dependents;
- This situation is likely to continue for a significant portion of the repayment period; and
- They have made good faith efforts to repay the loans.
The guidance provides a more objective and transparent way of applying the Brunner test. It uses various criteria to help determine if the above three prongs have been satisfied.
The guidance encourages the DOJ and the ED to review the borrower’s request for discharge as soon as possible. The purpose is to determine if the borrower meets the criteria for undue hardship without going to trial. They should not oppose the discharge if the student loans over 10 years old unless there are exceptional circumstances.
What is the scope and limit of the new guidance?
The new guidance is a significant improvement over the previous policies and practices of discharging student loans in bankruptcy. The guidance provides a more precise, fairer, and more consistent way of applying the undue hardship test. The goal is to reduce the burden on the borrower to prove their case. The guidance also increases the chances of settlement and helps minimize the cost of litigation.
However, the new guidance does not guarantee that the borrower will be able to discharge their student loans in bankruptcy. The guidance only applies to student loans held by the ED, such as Direct Loans. The guidance is only a policy document that guides the DOJ and the ED in their discretion and judgment. In some cases, the DOJ and the ED may still oppose the discharge of student loans. The bankruptcy court may apply a different standard or analysis to determine undue hardship.
Therefore, the borrower should not rely solely on the guidance to discharge their student loans in bankruptcy. The borrower should still consult a qualified Arizona bankruptcy attorney. The borrower should also be prepared to provide evidence and arguments to support their claim of undue hardship, in case the DOJ and the ED do not agree to settle or the bankruptcy court does not follow the guidance.