[co-author: Kerry Mackenzie]
Last week, the Department of Justice (DOJ) and the Department of Education (DOE) distributed guidance to the legal community clarifying the process for extinguishing federal student loans in bankruptcy proceedings. The agencies She said that the new guidelines will standardize, speed up and simplify the legal process that student loan borrowers must go through to pay off their loans.
Previously, Congress necessary student loan borrowers to prove in bankruptcy proceedings that they suffer “excessive hardship” unless their loan debt is paid off, a stricter standard than other comparable proceedings require. The new management seeks to define what qualifies as “undue hardship” to clarify which borrowers can apply for release and reduce the cost of legal investigations associated with proof of qualification.
The new guidelines request the DOJ to review a borrower’s past, present, and future financial circumstances using data from the DOE and a new attestation form completed by the borrower. The DOJ will use this information to provide a recommendation to the courts regarding the borrower’s qualification under the “undue hardship” rule. The standards that the DOJ will use are as follows:
- Determination of current ability to pay: Using the Internal Revenue System (IRS) standard and the information from the attestation form, the DOJ will calculate a debtor’s expenses. If that debtor’s expenses equal or exceed the debtor’s income, the DOJ will find that the debtor does not have the current ability to pay student loans.
- Determination of future ability to pay: If the DOJ finds that a debtor does not have current ability to pay student loans, it will access the debtor’s future ability to pay. The DOJ will assume that a debtor’s financial circumstances will not change if certain factors are present. These factors may include retirement age, disability or chronic injury, history of sustained unemployment, lack of a college degree, or extended repayment status. The DOJ will conduct a more individualized analysis if none of these factors exist.
- Determination of past ability to pay: If the Department of Justice finds that a debtor lacks past and present ability to pay student loans, it will assess whether the debtor has made a “good faith” effort in the past to pay off the loans. The DOJ will treat “reasonable efforts” to earn income, manage expenses, and repay loans as good faith efforts. For example, these efforts might include a borrower calling the DOE or their loan servicer to discuss payment options for the loan. A debtor will not be disqualified from consideration for not enrolling in an income-based repayment plan if they can demonstrate that they have been dissuaded from participating in such a plan or have another reasonable explanation for not enrolling.
To evaluate the effectiveness of their new program, the DOJ and the DOE engaged continue to monitor how their new legal guidelines play out in court over the next year. We will continue to monitor this plan and provide updates as developments emerge.