Justice Department announces new guidance for handling bankruptcy discharge of federal student loans
In conjunction with efforts to forgive federal student debt for certain borrowers, President Biden’s Justice Department recently announced new guidance for its attorneys to use when deciding whether to recommend that a bankruptcy judge discharge an individual’s federal student loans.
The guidance seeks to streamline the process of discharging federal student debt which, unlike other consumer debt, is not automatically discharged through bankruptcy. Rather, under the Bankruptcy Code, a debtor seeking to discharge such loans has to prove “undue hardship,” absent discharge, in an adversary proceeding in the bankruptcy court. The process and the three-factor Brunner Test adopted by most circuit courts for determining undue hardship have long been criticized by consumer advocates. (Under the Brunner test, the bankruptcy judge considers whether the debtor can maintain a minimal standard of living, whether the debtor’s current financial situation is unlikely to change, and whether the debtor has made a good faith effort to repay the loans.) However, such criticism has not moved the US Supreme Court, which last year declined to review the standards for determining undue hardship.
Under the Justice Department’s new guidance, debtors will complete an “attestation form” from which Justice Department attorneys will determine whether certain criteria are met – such as having expenses that exceed income and having made a “good-faith effort” towards repayment – and recommend either a full or partial discharge or, (although not specifically addressed by the guidance) perhaps even no discharge. Having a set of defined criteria is intended to provide more clarity and consistency in the application of the Bankruptcy Code’s undefined undue hardship standard which has resulted in different district courts applying different interpretations, including the Brunner test.
Some have raised concerns, however, that the “good-faith effort” prong in the new guidance is itself too vague, and could cause confusion in the discharge process. It also remains to be seen whether bankruptcy judges will simply adopt the guidance or whether they will consider themselves compelled to make independent assessments based on the standards for determining undue hardship adopted by their respective circuit courts, particularly in cases where the debtor is also seeking to Discharge private student debt. The guidance represents a coordinated effort between the Department of Justice and the Department of Education that was announced nearly a year ago. At that time, the Justice Department had also stated that it would stay any pending bankruptcy proceeding, at the borrower’s request, pending the announcement of the new guidance.