In a significant policy shift, the Department of Justice (DOJ), in collaboration with the Department of Education, has unveiled a new process aimed at facilitating the discharge of student loan debt through bankruptcy. This initiative is set to bring much-needed clarity and consistency to debtors navigating the challenging landscape of student loan discharge.
Traditionally, discharging student loans in bankruptcy has posed a formidable hurdle, requiring debtors to prove “undue hardship” through a separate adversary proceeding. Recognizing the complexities and burdens of this process, the DOJ’s new framework seeks to provide a more transparent and accessible pathway for debtors genuinely unable to repay their loans.
Under the revised process, debtors will now complete an attestation form that assists the government in evaluating the discharge request. This form, reviewed by DOJ attorneys in conjunction with the Department of Education, will serve as a cornerstone for assessing the debtor’s financial circumstances and determining the appropriateness of supporting a discharge.
The DOJ’s approach to evaluating undue hardship focuses on three primary factors. Firstly, the debtor’s present ability to pay is assessed by analyzing their income and expenses using existing IRS standards. If a debtor’s expenses equal or exceed their income, it will be determined that they currently lack the ability to pay. Secondly, the DOJ considers whether the debtor’s financial inability to pay is likely to persist in the future. Factors such as age, disability, chronic injury, unemployment history, lack of a degree, or extended repayment status will be indicative of prolonged financial distress. In their absence, the DOJ will examine additional evidence to forecast the debtor’s future financial situation.
Lastly, the DOJ evaluates the debtor’s good faith efforts to manage expenses, earn income, and engage with repayment options. This involves examining whether the debtor has contacted loan servicers about payment options and their rationale for not enrolling in income-driven repayment plans, if applicable. Past non-payment will not automatically disqualify a debtor if other indicators of good faith are present.
This new process promises to reduce the procedural burden on debtors and enhance DOJ attorneys’ ability to support discharge recommendations in deserving cases. While the final decision to grant a discharge rests with the bankruptcy judge, the DOJ’s role will be pivotal in advocating for debtors under appropriate circumstances.
By implementing these changes, the Department of Justice aims to ensure that the higher bar set for student loan discharge in bankruptcy is not an insurmountable barrier for those truly in need, thereby upholding the “fresh start” principle that underpins bankruptcy law.