New Student Loan Discharge Guidance: The Winds of Change or Lipstick on a Pig?
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By: Sarah Holden
Student loans are notoriously difficult to discharge in bankruptcy. For starters, unlike most other kinds of consumer debt, student loans are not dischargeable in bankruptcy without the debtor initiating a separate . Assuming the loans at issue are covered by the exception to discharge under , a debtor must then demonstrate that being forced to repay the student loans would constitute an undue hardship. Since 鈥渦ndue hardship鈥� is not defined anywhere in the Bankruptcy Code, the task of what actually constitutes an undue hardship is a matter of judicial discretion. That said, even though this standard has evolved differently in different circuits (e.g., the is used by nine circuits, while the and Circuits use a 鈥渢otality of the circumstances鈥� test), the consensus has been that As a result, very few borrowers have successfully had their student loan debts discharged in bankruptcy, leading to the .
There is hope that discharge under the undue hardship standard may be less rare in the near future thanks to recently announced by the Department of Justice (DOJ) in coordination with the Department of Education. The stated goals of the guidance include increasing transparency and consistency, lowering the debtor鈥檚 burden of proof, and increasing the number of cases that result in (even partial) discharge. The requirements are that (1) the debtor is presently unable to repay their student loans while maintaining a minimal standard of living, (2) such inability to repay is likely to persist for a significant amount of the loan repayment period, and (3) the debtor has made a good-faith effort to repay their loans.
A lot of the uncertainty stems from the fact that the guidance purports to be consistent with existing case law鈥攖he very same case law that has produced such abysmally infrequent relief. What does seem promising is that the guidance outlines five circumstances in which there would now be a presumption that a debtor鈥檚 inability to repay will persist. These circumstances include where (1) a debtor is 65 or older; (2) a debtor has a disability or chronic injury impacting their income potential; (3) a debtor has been unemployed for at least five of the last ten years; (4) a debtor has failed to obtain the degree for which the loan was granted; and (5) the loan has been in repayment for more than ten years. Of particular note, each of the listed circumstances seemingly pays homage to categories of particularly disheartening bankruptcy cases where discharge relief has been denied in the past. Some such examples include:
- 鈥� A Maryland court denied full discharge to a 68-year-old debtor who worked forty to eighty hours of overtime each pay period and owed more than $250,000.00 in student loans.
- 鈥� A Missouri court denied discharge to a 64-year-old debtor even though the debtor鈥檚 wife was fully disabled and the debtor himself had diabetes, a heart condition, and an ulcer that impacted his ability to work.
- 鈥� The debtors sought discharge in an Illinois court for a $7,847.00 student loan that had been in repayment for fifteen years and for which $4,600.00 had been originally borrowed. However, the discharge was denied鈥攄espite that the debtors had no medical insurance, had lost their home to foreclosure, and lived a 鈥渧ery frugal lifestyle鈥� more generally鈥攂ecause the court reasoned that the debtors should be able to make $163.00 per month payments on the student loan for the next five years given their calculated $179.00 monthly disposable income
Another important aspect of the new guidance is the consideration the DOJ is asking its attorneys to give to whether or not a debtor was enrolled in an income-driven repayment plan (IDRP). While enrollment in an IDRP is evidence in favor of a debtor making a good-faith attempt at repayment, the guidance also points out that non-enrollment in an IDRP may be due to factors beyond the debtor鈥檚 control. The guidance asks that DOJ attorneys 鈥渆xercise caution in assessing IDRP enrollment鈥� due to the amount of evidence that has come to light pertaining to servicer issues. While the guidance couches the problems as 鈥渁dministrative errors and dissemination of confusing and inaccurate information,鈥� these 鈥渆rrors鈥� include , charging , ,, among others.
It remains to be seen whether this guidance makes any meaningful difference in the availability of discharge for student loan borrowers in dire financial conditions. There is certainly that struggling borrowers may see some relief through bankruptcy in the near future. If nothing else, this author hopes that bankruptcy attorneys proceed cautiously and remain mindful of the importance of establishing new, more debtor-friendly precedents for student loan discharge cases. After all, it only took a few highly publicized examples of 鈥溾�� defaulters in the 1970s to push Congress to first limit the discharge of student loans to begin with.