Probably the most difficult task in bankruptcy is discharging student loans. While bankruptcy is offered to the innocent, but unfortunate, debtor in order to obtain a “fresh start,” Congress defines that fresh start. And Congress did not include forgiving most student loans. In fact, over time, the trend has been that Congress made it more and more difficult to successfully accomplish this task.
Some relief from this futility appears to be offered in a joint guidance to Department of Justice (DOJ) attorneys developed in cooperation with the Department of Education (DOE). The intent of the guidance is to streamline the government’s consideration of requests to fully or partially discharge a student loan. DOJ/DOE offers this program in addition to other options such as Income-Driven Repayment Plans, Public Service Loan Forgiveness and Cancellations. However, these options apply only to direct student loans from DOE and do not apply to private loans.
Undue Hardship
Under the current standards of the Bankruptcy Code, a debtor must prove that the continued obligation to pay student loans would be an “undue hardship.” Most courts, including the Bankruptcy Court in Harrisburg, have followed the Brunner test which requires debtors to prove current hardships, continuing future financial difficulties and a good faith effort to pay the loans in the past (ghosts of student loans past, present and future). Under the new guidelines, debtors will submit an attestation form which contains most of the information required by DOJ attorneys to analyze a discharge complaint.
Current Hardships
In regard to the present circumstances test, the guidelines direct the parties to determine disposable income by comparing the person’s income from all sources as compared to expense standards used by the IRS and on the means test in bankruptcy. Use of the IRS numbers is intended to standardize approved expenses and simplify the calculation of disposable income.
Future Circumstances
The future circumstances test receives a major overhaul. Rather than immediately determining all of a person’s future circumstances, certain presumptions will be used to qualify under this test. Therefore, those persons who are over 65 years old, disabled, unemployed for at least 5 of the last 10 years, and other circumstances will be presumed to have met the second test by government attorneys. While these presumptions are rebuttable based on the person’s actual circumstances, such a presumption puts the person way ahead of the game.
Good Faith Efforts
The final consideration regarding good faith efforts to make payments on the loans is likewise streamlined to an extent by various presumptions. The person will be presumed to have acted in good faith if payments were made, the person entered into an Income-Driven Repayment Plan, or reached out to his or her servicer to consolidate their loans, as well as other considerations. Bottom line, it appears that DOJ will be impressed with whatever activity took place to pay the loans and will not be impressed by requests for discharge after the debtor made no attempts to remedy the situation outside the bankruptcy arena.
These new guidelines along with the attestation form will certainly streamline the discharge process by emphasizing the areas in which DOJ attorneys will concentrate their analysis. While the process is simplified, it is not simple. You should seek experienced legal representation to make sure the discharge application takes advantage of all of the new features and puts your best foot forward. If you believe you are entitled to a fresh start due to an undue hardship from continuing to pay your student loan, contact us. We give second chances on Second Street.