Discharging Student Loan Debt In Bankruptcy

If you are drowning in student loan debt or struggling to repay your loans, filing for bankruptcy may now be a viable option for you. Recently the Justice Department (“DOJ”) and Department of Education announced new guidelines making it easier for debtors to discharge student loans in bankruptcy. This is an exciting development for people with student loan debt as previously attempting to eliminate student loans in bankruptcy proved impractical and burdensome. In this blog we will discuss the “undue hardship” test and the new guidelines provided by the Department of Education and DOJ.   

Undue Hardship Test

Prior to the new guidelines, to discharge student loans in bankruptcy, a debtor must pass the “undue hardship” test set forth in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987) (In re Brunner). Pursuant to In re Brunner, to discharge student loans in bankruptcy, a debtor must establish:

1. That they cannot maintain a “minimal” standard of living based on their income and expenses if required to repay the student loans;
2. That additional circumstances exist indicating the inability to repay the loans for a significant period; and
3. That they made “good faith” efforts to repay the loans. 

In re Brunner, 831 F.2d 395.

With the burden on the Debtor to establish these factors, courts often required debtors to provide meticulous student loan records, proof of income and expenses, and other documents. Even after providing these documents, courts reluctantly found the student loans dischargeable. Instead, suggesting debtors apply for repayment or loan forgiveness programs. The few successful cases involved debtors who were rendered disabled and unable to make a living in the future.

New Guidelines for Discharging Student Loans

Given the difficulties and lack of clarify in passing the “undue hardship” test, the Department of Education provided new guidelines to the DOJ with the aim of providing clearer and fairer standards to debtors attempting to discharge student loans. The guidance provides that attorneys for the DOJ will stipulate to the facts demonstrating the debt imposes an undue hardship when three conditions are satisfied:

“(1) the debtor presently lacks an ability to repay the loan;

(2) the debtor’s inability to pay the loan is likely to persist in the future; and

(3) the debtor has acted in good faith in the past in attempting to repay the loan.”

Guidance For Department Attorneys Regarding Student Loan Bankruptcy Litigation, Nov. 17, 2022, at 1. https://www.justice.gov/civil/page/file/1552681/download.

For the DOJ attorney to recommend the debt be discharged, the debtor will need to provide documents to support their case and fill out an attestation form.

More specifically, for the first test to be satisfied, the DOJ will look at the IRS standards of living to assess whether the debtor is able to maintain a “minimal standard of living” if required to repay the student loan debt. Practically speaking it appears that most debtors filing Chapter 7 bankruptcy would pass this prong with relative ease.

For the second test to be met, the DOJ will be looking for future circumstances that would prevent the debtor from being able to repay the student loan debt for a significant portion of the repayment period. For instance, they will assess whether the debtor is over the age of 65, has a disability, has been unemployed for a long period of time, or graduated more than 10 years ago.

For the third test to be established, debtors must show that they made a “good faith” effort to repay the loans. This would include a history of repaying the loans or applying for a deferment or forbearance of the loans. This test also appears to be relatively easy to pass as long as no fraud is found.

Even if these three prongs are not met, the DOJ may agree to “partially” discharge some of the debt. Altogether, this is an exciting development for debtors as there has been much uncertainty on whether student loans can be discharged in bankruptcy. Previously, meeting the Brunner test has been challenging and different judges have ruled differently.

Contact DebtPros Now to Eliminate Your Student Loans

If you have student loan debt and are struggling to repay your loans, contact us now at (312) 883-5422 to speak with one of our experienced bankruptcy lawyers. Whether you file a Chapter 7 or Chapter 13 bankruptcy case, your student loan debt may be eligible for discharge under the new guidelines discussed in this blog.