Previously, Congress required student loan borrowers to demonstrate in bankruptcy proceedings that they suffer “undue hardship” unless their loan debt is discharged, a more rigorous standard than other comparable proceedings require. The new direction seeks to define what qualifies as “undue hardship” to clarify which borrowers may apply for discharge and reduce the cost of legal investigations associated with proving qualification.
The new guidelines require the DOJ to review a borrower’s past, present and future financial circumstances using DOE data and a new borrower-completed attestation form. The DOJ will use this information to provide a recommendation to courts regarding the borrower’s qualification under the “undue hardship” rule. The standards the DOJ will use are as follows:
- Determination of Present Ability to Pay: Using Internal Revenue System (IRS) standards and information from the attestation form, the DOJ will calculate a debtor’s expenses. If that debtor’s expenses equal or exceed the debtor’s income, the DOJ will find that the debtor lacks a present ability to pay their student loans.
- Determination of Future Ability to Pay: If the DOJ finds that a debtor lacks the present ability to pay their student loans, they will access the debtor’s future ability to pay. The DOJ will presume a debtor’s financial circumstances are not likely to change if certain factors are present. These factors can include retirement age, disability or chronic injury, protracted unemployment history, lack of a degree or extended repayment status. The DOJ will conduct a more individualized analysis if none of these factors exist.
- Determination of Past Ability to Pay: If the DOJ finds that a debtor lacks the past and present ability to pay their student loans, it will assess if the debtor has made a “good faith” effort in the past to pay off their loans. The DOJ will consider “reasonable efforts” to earn income, manage expenses, and repay loans as good faith efforts. For example, these efforts could include a borrower calling the DOE or their loan servicer to discuss payment options for their loan. A debtor will not be disqualified from consideration for not enrolling in an income-driven repayment plan if they can prove that they were deterred from participating in such plan or had another reasonable explanation for non-enrollment.
To assess the effectiveness of their new program, the DOJ and DOE committed to continuing to monitor how their new legal guidelines play out in court over the course of the next year. We will continue to monitor this plan and provide updates as developments emerge.
