Commentary
November 18, 2022
DOJ Issues New Guidance on Discharging Student Loan Debt in Bankruptcy
Student loan debt has recently become the largest kind of unsecured debt reported by debtors on their bankruptcy papers, outpacing even the amount of credit card debt. If student loan debts can be more easily discharged in bankruptcy, then it is likely that more debtors holding such debt will seek bankruptcy relief.
In an announcement made on November 17th, the U.S. Justice Department (DOJ) may have just made bankruptcy relief significantly more available to student loan debtors. After close coordination with Department of Education, DOJ issued new guidance for handling student loans in bankruptcy. The guidance addresses long-standing criticism of the Government’s strict position on the dischargeability of student loans held by the Government and may cause U.S. Attorneys to urge bankruptcy courts to erase substantially more student loan debt than is currently allowed by the courts.
Under current law, student loans may be discharged in bankruptcy only if the debtor can establish through a separate “adversary proceeding” that payment would impose an “undue hardship.” Both Republicans and Democrats have criticized decisions by many bankruptcy courts that were viewed as draconian and unjustified even under the “undue hardship” standard.
According to the new DOJ guidance, U.S. Attorneys, who represent the Government’s financial claims in bankruptcy court, will ask debtors to fill out a DOJ attestation form providing information about factors that could demonstrate “undue hardship.” By stipulating in favor of discharge, debtors may be relieved of the burden of filing an adversary proceeding and make the Government a de facto advocate for discharge.
In a significant departure from past practice, DOJ attorneys may evaluate the attestation against extant court standards, but probably in a more lenient manner. Although the basic criteria applied by U.S. Attorneys are not new (i.e., present ability to pay, future ability to pay, good faith efforts to repay), the more specific guidance will allow the Government to give strong consideration to factors that favor the debtor. For example, debtors who declined to enter into long-term income-driven repayment plans with the Department of Education will not be disqualified if they provide an acceptable reason. On its face, the new guidance should eliminate many horror stories of senior citizens or severely ill debtors who cannot show “utter hopelessness” of recovery.
As with most guidance, answers to many questions may have to await the use of the guidance in practice. For example, has the Government taken on the debtor’s lawyer’s duty to establish eligibility and advocate for discharge? How will the guidance affect private student loan litigation? Will DOJ attorneys use the guidance to stipulate to discharge in even non-meritorious cases?
Stay tuned and AIS will keep you informed on this and other emerging bankruptcy issues.