Student Loan debt

New Process for Student Loan Bankruptcy Discharge

• The federal Bankruptcy Code allows certain student loans to be discharged only when repayment would cause undue hardship.

• Undue hardship means repayment would create serious financial difficulty for the borrower.

• To determine undue hardship, borrowers historically had to file an adversary proceeding (similar to a lawsuit) and have a Judge determine if the undue hardship standard is met.

• A new option now allows borrowers to file an attestation form shortly after filing an adversary proceeding for review by the DOJ/DOE.

Updated Rules From the Departments of Justice (DOJ) and Education (DOE)

• New DOJ/DOE rules aim to standardize how adversary proceedings are evaluated.

• Borrowers may submit an attestation form detailing their financial circumstances.

• The DOJ reviews the form using DOE guidelines and issues a recommendation on whether a discharge should be granted.

• This recommendation helps streamline the process before it reaches bankruptcy court.

The Brunner Test (Traditional Standard)

Bankruptcy courts typically use the Brunner test to determine undue hardship. The test requires proof that:

• The debtor cannot maintain a minimal standard of living if forced to continue payments.

• The debtor’s financial situation is not likely to improve during the repayment period.

• The debtor has made good-faith efforts to repay the loan.

Role of the Attestation Form

• The new attestation form helps DOJ attorneys evaluate the same factors in a standardized way.

• After review, the DOJ issues a recommendation to the court.

• The final decision on discharge remains with the bankruptcy judge.

Factors Considered Under the New System

1. Present Ability to Pay

• DOJ reviews income and expenses using IRS financial standards.

• The goal is to determine whether the borrower currently lacks the ability to meet repayment obligations.

2. Future Ability to Pay

• DOJ evaluates whether the borrower’s inability to pay is expected to continue.

• Considerations include:

  • Disability or chronic injury

  • Approaching retirement age

  • Long-term unemployment

  • Lack of a college degree

  • Extended repayment status

3. Good Faith Efforts

• DOJ examines whether the borrower:

  • Tried to obtain payment relief or modified repayment plans

  • Worked to increase income or reduce expenses

  • Made efforts to repay the loan

• Missing payments may not disqualify a borrower if good-faith efforts can be demonstrated.

Partial Discharge Possibility

• If a full discharge isn’t justified, the DOJ may recommend a partial discharge of the student loan.