In the final segment of the series, we will be discussing the process or procedure for getting your student loans discharged. Student loans do not automatically get discharged when you file the bankruptcy case.
They are presumed to be non-dischargeable unless you file what is called an adversarial proceeding complaint seeking a discharge of your student loans based upon undue hardship. The adversarial proceeding is associated with your bankruptcy case, but it’s a totally different proceeding with a different case number.
The first step is to determine if you meet the requirements previously mentioned so you have a likelihood of success when you file the adversarial proceeding. There is a process of collecting your student loan payment history and noticing the proper defendants when the lawsuit/adversarial proceeding gets filed.
There is now an attestation form that is filled out with supporting documentation to streamline the process. This is intended to encourage the department of education and trustee’s office to be able to stipulate to some facts without unnecessary litigation. The attestation form goes over some of the same categories as the bankruptcy petition such as your current income and expenses, future inability to repay your student loans, prior efforts to repay your student loans, and current assets.
There is additional costs associated with the adversarial proceeding such as additional attorney’s fees so you would need to budget the attorney’s fees and costs to file both the bankruptcy case and your student loan adversarial case. A ballpark estimate for both would be approximately $5,000-$6,000.
In Part VI of our series, we are discussing the possibility of getting a partial discharge of your student loans if you are unable to get a full discharge. A partial discharge can occur where the bankruptcy court discharges a portion of the outstanding student loan debt while requiring you to pay the remainder of the balance. The bankruptcy code is silent on the issue of whether the bankruptcy courts may offer a partial discharge of student loans based on undue hardship. However, this issue has been litigated and is recognized by several court of appeals. A partial discharge will require that the debtor establish elements necessary for an undue hardship determination.
According to the departmental guidance regarding student loans, the department of education attorneys may consider a partial discharge if they have made the determination that the debtor has the ability to make some payment on the loan while maintaining a minimal standard of living, but an inability to make the full standard monthly repayment. That is distinguishable from getting a full discharge where the debtor is completely unable to maintain a minimal standard of living and has no disposable income after paying their expenses. A partial discharge should result in a balance lower than the debtor’s discretionary income so they can afford the monthly loan payment over the remaining term of the loan. A partial discharge may also be available if a debtor can liquidate assets to pay a portion of the debt but is unable to make the monthly payment while maintaining a minimal standard of living.
In the last part of our series, we will be discussing the process/procedure to get my student loans discharged?
The next step in the analysis for the Department of Education, after determining your present ability to pay your student loans is to evaluate your future ability to pay your student loans. The debtor is presumed to have an inability to repay their student loan debt in the following circumstances: (1) debtor is age 65 or older; (2) debtor has a disability or chronic injury impacting their earning potential; (3) debtor has been unemployed for at least five of the last 10 years; (4) debtor has failed to obtain a degree for which the loan was procured; or (5) the loan has been in a payment status other than “in school” for the last 10 years. Where such factors are not present, the Department attorney will assess whether the debtor’s present inability to pay is likely to persist. This is a rebuttable presumption.
For example, if the debtor has not finished a degree, but has job offers and is making more money than if they would have if they obtained their degree, then it would be rebutted that the debtor has the ability to pay their student loans since the lack of a degree is not affecting his/her earning potential. If the borrower is married, the spouse’s income will not be counted in determining undue hardship eligibility, provided that the joint debtor is not a co-borrower on the student loans. This is different than the requirement on the bankruptcy petition which requires the debtor to include their spouse’s income even if the spouse is not filing for bankruptcy.
There is no presumption of inability to pay if the debtor obtained their degree in a field with limited earning potential. If debtor has $100,000 in student loans but doesn’t have earning potential of ever making $50,000 with their degree, the debt won’t get discharged. Someone in that situation would need to do an income-based repayment. Our next blog will examine the Department of Education’s standard of good faith efforts to repay your student loans to obtain a discharge.
I will be doing a seven-part series to answer questions on how to get an undue hardship discharge of your student loans in bankruptcy. I have been getting questions from both current and potential clients who have heard about the recent new guidance from the Department of Education / Department of Justice on student loan discharges wondering if the new guidance applies to their situations.
The series will include the following parts:
Part I: What recent changes have been made to assist borrows in qualifying for student loan discharge?;
Part: II: Element #1, Explanation of Present Ability to Pay your Student Loans;
Part III: Element #2, Future Ability to Pay your Student Loans;
Part IV: Element #3, Good Faith Efforts to Repay your Student Loans;
Part V: How does the Debtor’s Assets play a role in dischargeability of their student loans?;
Part VI: When is a partial discharge possible, if the debtor is ineligible for a full discharge of their student loans?;
Part VII: What is the process/procedure to get my student loans discharged?
The new student loan guidance is effective for any bankruptcy cases that are open as of November 17, 2022. Older cases cannot be reopened. You would need to file another bankruptcy case whenever you become eligible. Only loans issued from the Department of Education qualify for the discharge. According to the “Brunner Standard” which is what we have been following: (1) The debtor cannot presently maintain a minimal standard of living if required to pay the student loan; (2) Circumstances exist that indicate the debtor’s financial situation is likely to persist in the future for a significant portion of the loan repayment period; and (3) The debtor has made good faith efforts in the past to repay the student loan.
The current standard is whether the payment of the loan would cause an undue hardship on the debtor. Whether the debtor has a present and future ability to maintain a minimal standard of living while making student loan payments and has made a good faith attempt to repay their student loans. So, the standard is essentially the same. However, there are now clearer guidelines on exactly what those standards mean and the circumstances that would qualify someone. The guidelines are intended to ensure more consistent treatment for student loan discharges and to facilitate an easier fact gathering process for the United States Attorney’s office and the Department of Justice.
