Student Loan Debt and Bankruptcy

By Mary Conner Pool

For years, most borrowers filing for bankruptcy did not get relief from their student loan debts; instead, they had to deal with them once they were out of bankruptcy. To attempt to get relief from a student loan, a debtor files a separate lawsuit called an adversary proceeding to determine whether the debtor meets an “undue hardship” burden to discharge their student loans in whole or in part. The criteria on whether the debtor qualifies for such relief boils down to whether making the student loan payments would cause an “undue hardship” for the debtor if they were repaid. These separate lawsuits usually require debtors to pay additional money to attorneys separate from their bankruptcy fees. To show that a debtor will suffer undue hardship if the debtor repays a student loan is a difficult standard to prove and varies by district. In some districts, the “undue hardship” burden is almost impossible to prove.

New Guidance with Handling Adversary Proceedings Seeking to Discharge Student Loan Debts

On November 17, 2022, at the direction of the Biden administration, the Department of Justice issued guidance to government attorneys on how they can make recommendations to the bankruptcy courts in adversary proceedings to discharge student loan debt either fully or partially. The Department of Education must approve these recommendations. This guidance applies to federal student loans only. The debtor still must file a lawsuit (an adversary proceeding) against the Department of Education, complete the analysis, and bear the burden to prove the undue hardship. The burden is much lighter under the new guidance. The process of settling these cases after filing the lawsuit depends on how your local U.S. Attorney’s Office manages these cases.

New Procedures in Handling Adversary Proceedings Seeking to Discharge Student Loan Debt

Before Filing the Adversary Proceeding

Your attorney will first need to gather documentation from you to decide whether an adversary proceeding seeking to discharge your student loan debts would be worth filing. Your attorney will need to complete an attestation form to provide to the U.S. Attorney that will be completed using information gathered from you, including but not limited to:

1. Are your student loans private or federally funded? Only federal student loans fall under these guidelines.
2. Your National Student Loan Data System (NSLDS) report will show all your student loans and various data for a layperson to read. # # You can obtain your report via studentloanaid.gov using your FSA ID. It is against the law for anyone other than yourself to retrieve this report, including your attorney.

Bank statements for several months with your monthly expense amounts. Although your attorney will review this information, if your expenses are lower than the IRS Standards for specified categories, your attorney will use the higher IRS Standards to analyze whether your student loans are discharged in full or in part. IRS Standards exist for many household and personal expenses and are used primarily for tax analysis. These standards change often depending on where you live in the United States.
What efforts, if any, have you made to repay the student loans, including any attempts by you to work out deferments of payments?
How many people live in your household, or who do you support?

How many people earn income in your household?

What the adversary proceeding and attestation form must prove is that you lack the ability to repay the student loan, your inability to repay the loan will likely “persist in the future,” and that you “acted in good faith in the past by attempting to repay” your student loans. Proving that you tried to repay could be as little as a $0 monthly payment schedule, consistently staying in touch with the student loan companies, or just paying a $1.

Your attorney should reach out to the U.S. Attorney’s office to put it on notice that an adversary proceeding (lawsuit) is to be filed on your behalf to seek to discharge your student loans through your bankruptcy.

Filing of the Adversary Proceeding

Once filed, a case number is assigned to the adversary proceeding. Your attorney will serve the Department of Education, Department of Justice, local U.S. Attorney, and other parties of the lawsuit to put all on notice. Once your attorney issues service, the timing will begin for the Department of Education to file a response.

After Filing the Adversary Proceeding

The U.S. Attorney will represent the Department of Education and file an answer to the adversary proceeding. If it fails to do so, your student loan may discharge in bankruptcy. Using the guidance from the Department of Justice issued in November 2022, the U.S. Attorney will make recommendations to the Department of Education based on the information your attorney provides within the adversary proceeding and directly to the U.S. Attorney, including the attestation form mentioned earlier. The U.S. Attorney may recommend a full or partial discharge or defend the lawsuit.

If the Department of Education defends the lawsuit, it will cost you more money to prove the case since the “undue burden” criteria are applicable unless you dismiss the lawsuit. Your attorney will be looking to reduce costs by seeking to settle the adversary proceedings with the Department of Education as quickly and efficiently as possible.

The Guidance From a Bankruptcy Attorneys Perspective

At first, the guidance was exciting since I would finally get the opportunity to offer a real solution to my clients and future clients on getting relief from their student loans. Now that eight months have passed since the guidelines were issued, I am not seeing the windfall of settlements in these lawsuits. I think it is because the U.S. Attorneys and the Department of Education are still figuring out how these settlements will work and what Department of Education representatives can make these decisions to communicate to the U.S. Attorneys. I am still hopeful that the process will be worked through as more lawsuits are filed. I just pray it is not at the expense of my clients who desperately want relief from the overwhelming student loan debt(s) they face.

What Should You Do If you have Federal Student Loans and Are in Bankruptcy or Considering Filing for Bankruptcy?

If you live in Mississippi or Alabama, contact us at Bond & Botes. We provide a free initial consultation to discuss your federal student loans and the potential to have them discharged in your bankruptcy. A bankruptcy attorney should discuss both the bankruptcy process and the potential process/success of having your student loans discharged.