The Department of Justice, in coordination with the Department of Education, has announced a new process for its handling of bankruptcy cases in which debtors seek an undue hardship student loan discharge. This new guidance has been a long time coming. In 2016, the DOE issued a request for information regarding evaluating undue hardship claims. Slipster Dalié Jiménez and I (along with co-authors) submitted a response that urged the DOE to establish clear, easy-to-verify circumstances under which it would support (or not object to) debtors' requests for student loan discharges. Subsequently we published articles expanding on and updating our proposals, always focusing on how the DOE could craft guidelines that would provide specific, objective criteria for when the DOE would not object to a requested discharge, thereby removing the guess work from discharge requests, and hopefully encouraging the filing of more student loan discharge adversary proceedings.
The new guidelines will go a long way in helping people obtain student loan discharges. They incorporate key aspects of what consumer advocates and academics have highlighted as important to promote discharges for people who will benefit from student debt relief. I predict that, over time, more consumer debtors will request and receive undue hardship discharges.
In short, the new process requires the debtor to submit an attestation form with information that will allow the DOJ and DOE to assess the three prongs of the Brunner test. At first glance, this may seem like a rehashing of the Brunner standard, thus providing the DOJ and DOE with significant wiggle-room to decide whether to support discharge. But upon digging into the requirements to meet each prong, it becomes more clear that the DOJ and DOE, overall, has adopted clear, objective criteria for its decision-making. This should provide debtors and attorneys with confidence in how the DOJ and DOE will respond to student loan discharge requests. Details about how the DOJ and DOE will handle assessing each of the prongs, plus some ruminations on how this guidance may play out, after the break.
Most notably, if a debtor meets certain criteria, the DOJ and DOE will support the debtor's request for a discharge. The bankruptcy judge will have the final say as to whether the debtor meets the undue hardship standard. Yet having the DOJ and DOE not merely not object to the discharge request, but proactively support the discharge request, in many instances, likely will result in the judge agreeing with the DOJ, DOE, and the debtor. Also notable is the guidance about the import of non-enrollment in an income driven repayment (IDR) plan. Debtors' lack of enrollment in IDR plans has become a significant barrier to obtaining student loan discharges. Courts have taken non-enrollment as evidencing bad faith in trying to repay loans, despite the reality that it can be very difficult to enroll in IDR plans. The new guidance recognizes this reality in setting forth criteria for how debtors can show good faith efforts to repay student loans.
The Brunner standard's three prongs are: current inability to pay, future inability to pay, and prior good faith efforts to pay. For inability to pay, the new guidance provides that if the debtor's current expenses, based on IRS standards, are greater than monthly income, the debtor does not have the current ability to pay student loans. Debtors already have to assess income versus expenses based on the standards. Using the same standards for this determination is consistent and efficient. Plus debtors (and their attorneys) should have confidence whether they will meet this prong.
The same is true for the guidance about the second prong, future inability to pay. This prong also is where the DOJ and DOE has done the most in terms of adopting clear and easy-to-verify criteria that assess people's financial outlook. Some of these criteria reflect the criteria proposed by academics and consumer advocates. Debtors aged 65 or over, with a disability or chronic injury, unemployed for at least five of the last ten years, and who have been attempting to pay student loans for at least ten years, will be presumed to be unable to repay in the future. Most notably, if the debtor failed to obtain a degree for which the loan was procured, the debtor also will be presumed to be unable to repay. These presumptions are rebuttable. But, again, they should give debtors (and their attorneys) confidence about whether they meet this prong.
The third and final prong is good faith efforts to repay. I suspect that debtors and their attorneys will find the criteria for this prong the most susceptible to uncertainty about how the DOJ and DOE will respond to discharge requests. The DOJ's memo highlights several steps as evidencing good faith, including making a payment, applying for a deferment or forbearance, applying for an IDR plan, responding to outreach from servicers, or engaging meaningfully with the DOE about payment options. This portion includes the guidance about non-enrollment in IDR plans as not preclusive of a finding of good faith. Although the outlined criteria are generally easily attested to by debtors, my worry with the guidance is that the DOJ or DOE still could find a lack of good faith via rebuttal of the presumption created by these criteria or through interpretation of what it means to respond to servicers or engage with the DOE. Nonetheless, over time, it likely will become clearer how the DOJ and DOE are applying the criteria in this prong, hopefully removing what I see as initial uncertainty.
This prong also may skew to benefitting debtors with attorneys more so than the criteria for the other prongs. Before filing bankruptcy, debtors with attorneys will know to document that they took at least one (possibly more) of the good faith steps. Debtors without attorneys may be more likely to not engage in such pre-bankruptcy planning. This will not always preclude these debtors from getting DOJ support for discharge, but it likely will make it more burdensome for them to show good faith via the attestation form.
Similarly, overall, as with most aspects of law, those debtors with attorneys likely will fare better with submitting the attestation form and receiving DOJ support for discharge. Indeed, the form provides an opportunity for consumer debtor attorneys to specialize in student loan discharge cases. With time, as the DOJ works through requests, it should become apparent to attorneys when the DOJ will support requests, which will allow attorneys to save clients time and money in only launching adversary proceedings that have a good chance of success.
With this in mind, my final primary critique of the guidance is that the DOJ could help even more debtors by revising the timing of the submission of the attestation form to before the filing of an adversary proceeding. Adversary proceedings are expensive. It would benefit debtors to know ahead of time whether the DOJ will support an undue hardship discharge. Allowing debtors to submit the attestation form before opening adversary proceedings should not significantly increase the number of forms submitted. About one-quarter of debtors come to bankruptcy owing student loan debt. With the clear criteria, all debtors with student loan debt should have a sense of whether they are likely to meet the DOJ's expectations for its support a discharge. Only those debtors who think they will receive DOJ support should take the time to fill out the form. But this will allow debtors (with or without counsel) to be assured that they will have the DOJ's support before spending time and money filing the necessary adversary proceeding.
Find the DOJ's full guidance memo here.
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