The DOJ and DOE have announced a new process to review requests for discharge of student loans in bankruptcy. The guidance offers more consistency and predictability by laying out objective criteria the government will use in assessing “undue hardship” under 11 U.S.C. § 523(a)(8). The guidance also adopts a much more forgiving standard than some of the case law (or at least the conventional wisdom) might suggest.
The guidelines describe the process for reviewing three factors:
(1) Present ability to pay. The guidelines refer to the IRS Collection Financial Standards for assessing a debtor's present ability to pay. These standards are restrictive for some debtors, but they do not demand extreme frugality. Many debtors would satisfy this factor based on the National and Local Standards alone, but the guidance allows consideration of other necessary expenses as well. The guidelines do also address the standards for requiring liquidation of assets.
(2) Future ability to pay. The guidelines identify certain conditions that the Department will treat as creating a rebuttable presumption of a future inability to pay. The identified conditions do not require complete hopelessness. They are:
65 or older;
Disability or chronic injury impacting income potential;
Unemployed for at least 5 of the last 10 years;
Failed to obtain degree for which loan was procured; or
At least 10 years out of school.
(3) Good faith efforts. The guidelines outline objective criteria for evaluating good faith. It identifies the following steps as evidence of good faith (and notes mitigating factors as well):
making a payment;
applying for a deferment or forbearance (other than in-school or grace period deferments);
applying for an IDRP plan;
applying for a federal consolidation loan;
responding to outreach from a servicer or collector;
engaging meaningfully with Education or their loan servicer, regarding 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.
Find details about the new process here:
- Appendix A (Debtor Attestation Form)
- Appendix B (Example)