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New Rules Help Borrowers Eliminate Student Loan Debt With Bankruptcy

Student loan debt has traditionally been hard to eliminate through bankruptcy. The Department of Justice has now created new guidance for evaluating cases and recommending bankruptcy discharge of student loan debt. With these new rules and guidelines, it will be easier to eliminate student loans in bankruptcy.

The Undue Hardship Standard

Student loan debt has been harder to clear through bankruptcy because Congress made laws that say student loan borrowers must show that they will suffer "undue hardship" before they can qualify to eliminate the student loan debt in bankruptcy. According to the Department of Education, the high bar that Congress has set to eliminate student loan debt "has become very difficult for deserving borrowers to clear." It is always up to the bankruptcy judge to consider all the facts of the case and decide if it meets the standard of "undue hardship" that will allow the debt to be cleared in bankruptcy.

With the new guidance from the Justice Department, the specifics of what a borrower must prove to get relief from student loan debt are clearer and more predictable. Many borrowers may now find that they meet the legal standard under the new guidelines.

New Guidance Sets Clear Standards

The "undue hardship" requirement to get bankruptcy relief remains the same, but the Justice Department now instructs its attorneys to assess each request for bankruptcy relief of student loan debt under the new guidance. The new guidelines aim to decrease difficult and time-intensive background investigations when a borrower requests a discharge of student loan debt.

Ten Steps To Make A Case For Student Loan Debt Relief In Bankruptcy

Bankruptcy experts explain that the new guidance provides a much clearer and simpler path to discharging student loan debt. The ten steps that experts recommend the borrower follow are best implemented with legal expertise and advice to get the optimal results from the process, as the rules remain somewhat complicated.

Step One

The first step involves filing an "adversary proceeding" in the bankruptcy case. This lawsuit relating to the bankruptcy case asks the judge for a declaratory judgment that the student debt at issue can be eliminated.

Step Two

For the second step, the Assistant US Attorney (AUSA), who represents the Education Department (ED) in the case, requests a litigation report from the ED. The report summarizes the borrower's account history and loan information.

Step Three

The third step involves reviewing and understanding the 15-page Attestation Form the borrower must complete. The litigation report can be helpful for the borrower and the borrower's attorney in filling out the Attestation Form.

Step Four

Step four involves providing an accurate statement of the borrower's current income, including gross income from employment, Social Security or unemployment benefits, and any other income, if applicable. Verification of income is to be attached to the form.

Step Five

In step five, the borrower indicates current expenses with simple "yes" or "no" checkboxes on the Attestation Form. The form asks whether the borrower's household expenses are above or below the amounts shown on the form for the person's family size. Expenses that are below the standard allowance amount are accepted without further inquiry, while amounts above that will require a reasonable explanation for why that person spends more on that category of expense.

Step Six

For step six, the borrower totals the income and expense reports and shows the difference. If household expenses are equal to or very near total income, then there is nothing available to make loan payments with, and a settlement is likely. If the total household expenses are less than the total income and there is enough left over to make full payments, then the AUSA will not recommend the settlement of the debt.

Step Seven

Step seven involves showing that the debtor will continue to be unable to pay the debt in the future. The guidance establishes some presumptions that the inability to pay will continue, which include cases where the debtor is:

  • Age 65 or older
  • Suffering from a disability or chronic injury
  • Unemployed for at least five of the last ten years
  • Unable to earn the degree that the loan was for
  • In a payment status other than "in-school" for ten years or more

Step Eight

In step eight, the borrower must show that they've made a "good faith attempt to repay" the debt. Factors that show good faith include making some payment, requesting a deferment or forbearance, consolidating loans, attempting an income-based repayment plan, responding to collection attempts, and working meaningfully with ED or the loan company to resolve the debt or working with a third party in an attempt to manage the debt.

Step Nine

The debtor's assets are listed in step nine of the process. The guidance requires that the Attestation Form include a statement of all the debtor's property, with an opportunity to explain whether hardship would result if they had to sell any of those assets to make payment on the debt.

Step Ten

Finally, step ten involves the AUSA deciding whether to recommend a debt settlement. If the government attorney recommends settling the debt, the borrower is asked to "stipulate to the facts demonstrating that a debt would impose an undue hardship." The stipulation does not bind the bankruptcy judge to agree to the result requested, but in practice, bankruptcy courts typically approve such consent judgments that parties agree to.

Get Legal Help With Student Loan Debt Elimination

At Law Office of Simon Goldenberg, PLLC, we've helped many student loan borrowers get relief from overwhelming debt. When you contact us for a free consultation, we can start to guide you on the path back to financial stability. If you've been wondering whether you may be eligible for the elimination of student loans through bankruptcy, contact us for assistance by calling (888) 301-0584 or contact us online.