New Guidelines on Student Loan Discharge in Bankruptcy
Dec. 20, 2022
For those seeking to discharge their student loan obligations (along with other debts) through bankruptcy, it can be a difficult process. The bar to doing so has long been high and hard to achieve. You have to follow the normal bankruptcy proceedings, but there are additional steps. You will also go through what is called an adversary proceeding to prove that continuing to pay the debt will pose an undue hardship.
If you are saddled with student loan obligations and otherwise under water in debt in or around Alexandria or Falls Church, Virginia, contact the bankruptcy attorneys at Vivona Pandurangi, PLC. We can review your financial situation with you and help you file the bankruptcy petition and accompanying attestation form to seek a fresh start under the law. We also offer services in Arlington, Fairfax, Manassas, Prince William, Loudoun, and elsewhere.
New Process for Student Loan Bankruptcy Discharge
The federal Bankruptcy Code allows for the discharge of certain student loans, but only if continuing to pay the loan creates undue hardship on someone. Undue hardship would create significant difficulties for a person. An adversary proceeding can help determine if maintaining (not discharging) the student debt would pose an undue hardship. Before filing adversary proceedings, which is the equivalent of a lawsuit, you may first file a form called attestation.
Recent rules released by the Departments of Justice and Education seek to standardize the adversary proceedings and allow the petitioner to first file a form called an attestation. This will set forth the financial plight of the petitioner if a discharge of student debt is not allowed. The form will be reviewed by the Department of Justice (DOJ), following Department of Education (DOE) standards, and then issue a recommendation one way or the other if a discharge should be allowed.
The most common standard followed by bankruptcy courts in determining if an undue hardship would result goes by the title of the “Brunner test,” following a court case, Brunner v. New York State Higher Education Services Corp.
The Brunner test requires that the bankruptcy court find the following:
The debtor cannot maintain a minimum standard of living if forced to continue paying the debt
The debtor’s financial condition is judged to continue to exist into the future of the loan period
And if the debtor has made good faith efforts to repay the loan
The introduction of the attestation form and the evaluation of it by the Department of Justice seeks to standardize evaluation of the relevant factors, so that a recommendation can be made prior to an adversary proceeding. The rest is up to the court.
Factors Considered Under the New System
To determine undue hardship from facts submitted on an attestation form, DOJ attorneys will consider these factors, which largely mirror the Brunner test standards:
Present Ability to Pay: Using standards developed by the Internal Revenue Service, along with the information provided on the form, the attorneys will calculate a petitioner’s expenses compared to their income to determine if the debtor lacks a present ability to meet obligations.
Future Ability to Pay: The department will then try to determine if the present inability to pay will continue into the future. Factors to be considered include disability or chronic injury, retirement age, a long history of unemployment, lack of a degree, and extended repayment status.
Good Faith Efforts: The consideration here is whether the debtor reached out for options in reducing or arranging better repayment terms for the loan. Also to be considered are the debtor’s efforts to earn sufficient income, manage expenses, and repay their loan. If such good faith efforts can be shown, then a debtor likely will not be disqualified even if payments were missed.
Even if the department finds that a full discharge is not warranted, it may still recommend a partial discharge.
Legal Advocacy When You Need It Most
Bankruptcy can be a scary word to many, but it is also a legal means to discharge your debts and get a fresh start in life. Student loan discharges have long been a stumbling block for many to achieve that fresh start, but with the joint cooperation of the Department of Justice and the Department of Education, discharging student loan obligations has become more focused.
If you are seeking a fresh start in life through bankruptcy and need to deal with student debt that is posing an undue hardship, contact the bankruptcy attorneys at Vivona Pandurangi, PLC. We will help you navigate the system, file the attestation form, and then represent you through bankruptcy court proceedings. We have offices in Alexandria and Falls Church, but we also represent those in all neighboring communities as well. Reach out today for a free consultation.