New guidelines from the U.S. Department of Justice and the U.S. Department of Education might lead to more federal student loans being discharged in bankruptcy. Although the new guidelines don’t change the Bankruptcy Code or prior caselaw, they might lead to a different approach and attitude by the U.S. Department of Justice when debtors in bankruptcy file adversary proceedings asking that their federal student loans be discharged. To seek a discharge of student loans in bankruptcy, debtors must go beyond just filing bankruptcy. Debtors must file a separate lawsuit (“adversary proceeding”) while in the bankruptcy requesting that their student loans be discharged. Those separate lawsuits typically cost an additional amount of money beyond the cost of the bankruptcy itself. The guidelines won’t change this requirement. What they might change is how the U.S. Department of Justice deals with the lawsuit.
After a student loan adversary proceeding is filed, the Department of Justice will ask debtors to complete an “attestation” or form requesting information about their income, expenses, federal student loans, property, past student loan repayment history and future prospects for payment of the student loans. The Department of Justice will review whether the form shows the debtor is unable to repay the loan both currently and in the future and whether the debtor has acted in good faith in the past in attempting to repay the loans. Debtors will be presumed to be unable to pay the loans in the future if they are 65 years or older, disabled, have a chronic injury that affects their income, have been unemployed for at least five of the last ten years, failed to obtain the degree for which they went to school or the loan has been in payment status for at least ten years. Some of the ways good faith can be shown by debtors is by them having made payments, applying for a deferment or forbearance, applying for an income based repayment plan or by applying for a consolidation.
It remains to be seen whether these new guidelines will result in a drastic change in how many federal student loans get discharged in bankruptcy, but they at least lead to optimism that more debtors will find relief from overwhelming student loan debt.