Recent pro-bankruptcy Student Loan changes for the year 2023 will make discharges of student loan debt less difficult
The year 2023 could be a game-changer for those struggling with Federal student loan debt ( this does not apply to private student loans). Late in 2022, the Department of Justice issued guidance on how to handle student loans in bankruptcy cases. This guidance is essentially the "rules" that government attorneys must follow when dealing with student loan debt in bankruptcy and overall these guidelines are much more accepting a discharge or partial discharge of a student loan.
The guidance advises Department attorneys to stipulate to the facts demonstrating that a debt would impose an undue hardship and recommend to the court that a debtor's student loan be discharged if three conditions are met: (1) the debtor currently lacks the ability to repay the loan; (2) the debtor's inability to pay the loan is likely to persist in the future; and (3) the debtor has acted in good faith in the past in attempting to repay the loan.
This may not seem like much, but it's a significant shift in how student loans are handled in bankruptcy. The three factors are summarized as follows:
Present ability to pay
This process was streamlined by allowing debtors to sign an "attestation" which is a sworn statement of the debtor's financial condition and they'll be allowed to attach supporting documents as "proof" of their financial condition. The form will use expenses set by the IRS (IRS Standards) to determine the minimum that a debtor needs to live. In the past, a persons expenses where challenged at every step with questions like, do you really need a cell phone?
Ability to pay persists into the future
This condition is reviewed to see if it will persist into the future. Bad luck now doesn't mean bad luck forever. Even better is that there will be some presumption that the debtor cannot pay when the following are present: (1) the debtor is age 65 or older; (2) the debtor has a disability or chronic injury impacting their income potential; (3) the debtor has been unemployed for at least five of the last ten years; (4) the debtor has failed to obtain the degree for which the loan was procured; and (5) the loan has been in payment status other than ‘in-school’ for at least ten years. These presumptions are rebuttable but the "presumption" goes a long way for success. In the past, even severely disabled Debtors were considered "able" to work and pay for their student loan debts.
Assessment of "good faith" in paying the student loans in the past
This prong reviews whether the debtor has demonstrated good faith in meeting their student loan payment obligations. Sample factors that will be considered to demonstrate good faith are: 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. The good faith standard also assesses criteria such as “the debtor’s efforts to obtain employment, maximize income and minimize expenses.”
Consideration of Assets to pay student loans
The guideline suggests that assets necessary for the health and welfare of the debtor (such as a house or retirement account) should only be rarely sold to contribute towards the student loan debt. This is a big step towards avoiding a complete sale of assets to pay towards the debt.
Overall, this guidance is a positive step towards helping those struggling with student loan debt in bankruptcy. By streamlining the process and providing specific factors for determining undue hardship, it may make it easier for individuals to have their student loan debt discharged in bankruptcy. You can read the guidance below.