The Department of Justice Is Here to Help With… Bankruptcy Discharges of Student Loans?

When it comes to getting rid of debts in a Chapter 7 bankruptcy, not all debts are treated equally, and for a long time, student loan debt has been treated the most unfairly of all. According to the latest figures, the average student loan balance among borrowers is $38,290, which can be a sizeable chunk of debt for many households, maybe even the largest source. Yet unlike other forms of debt – such as medical bills or credit cards – student loan debt can only be discharged by showing that paying the loan would be an “undue hardship” for the debtor. And this fact must be proven in a separate proceeding in Bankruptcy Court that goes under the ominous title of “Adversary Proceeding.”

Student loans have historically been very nearly impossible to discharge in bankruptcy because of the very high bar set by the “undue hardship” standard. In recent years, however, courts and government agencies have begun to take a kindler, gentler approach to this dire situation for people struggling with paying off their student loans amid other sources of debt that are keeping them down. Recently, the Department of Justice announced that it would be implementing a new process to support debtors seeking a discharge of federal student loan debt. Learn more about this shift in attitude from the DOJ below. For help with bankruptcy and debt relief in Oxnard, Camarillo, and throughout Southern California, contact Rounds & Sutter to discuss your situation with a team of skilled and experienced Ventura bankruptcy lawyers.

New Justice Department Process for Student Loans in Adversary Proceedings

An adversary proceeding in bankruptcy court has the same meaning as a lawsuit in civil court, although adversary proceedings are governed by the Federal Rules of Bankruptcy Procedure rather than the Federal Rules of Civil Procedure. An adversary proceeding is different from the main bankruptcy case and doesn’t occur in the majority of Chapter 7 or Chapter 13 cases. Adversary proceedings typically only arise if a creditor is challenging the dischargeability of a debt, or if the trustee is trying to get back property that you sold or transferred before filing for bankruptcy.

For debtors who want to discharge their student loan, however, they can expect an adversary proceeding to be part of their case. It is here that the borrower must show that paying off the debt would be an undue hardship. In an effort to make it easier for debtors to pursue a discharge of their debt (and to make it easier for DOJ lawyers to determine whether the discharge is appropriate or not), the Justice Department is changing the way it assesses the undue hardship factors, which include the borrower’s present ability to pay, future ability to pay, and good faith efforts they have made toward paying off the loan. Starting this year, DOJ will apply the following analyses to determine whether to recommend discharge to the court:

• Present Ability to Pay – An attorney with the Justice Department will calculate the debtor’s expenses and compare them to the debtor’s income, using IRS standards and the information provided by the debtor. If expenses equal or exceed income, the Department’s position will be that the debtor lacks the present ability to pay.

• Future Ability to Pay – Justice will look at a host of factors (age, disability, employment history, education…) to determine whether the debtor’s present inability to pay is likely to persist in the future. If those factors are present, future inability to pay is presumed. Even without those factors, the Department will still look at the facts in the case to assess whether the debtor has made a showing of inability to pay in the future.

• Good Faith Efforts – In the past, missing payments or failing to enroll in an income-driven repayment plan could disqualify a debtor from showing they have made good faith efforts to repay. Now, the DOJ will look at objective criteria that reflect reasonable efforts of the debtor to earn income, manage their expenses and repay the loan. If a borrower has contacted the Department of Education or their loan servicer to discuss repayment options, and if they can provide a reasonable explanation for why they missed payments or didn’t enroll in a repayment plan, then evidence of good faith can overcome what in the past might have doomed an attempt at discharge.

Contact Rounds & Sutter for Advice and Representation in Your Southern California Bankruptcy Case

Ultimately, it is the bankruptcy judge who decides whether the undue hardship standard was met or not and whether to grant a student loan discharge in bankruptcy. Nevertheless, the Department of Justice can play an important role in this process by supporting a debtor’s discharge application where it deems appropriate, and the DOJ has signaled an intention to help debtors when it can. This is good news for borrowers struggling to repay their student loans. While the process is still difficult and challenging, it’s worth considering in appropriate circumstances. To discuss the possibility of discharging your student loan debt in Chapter 7, or to explore other debt relief options in Southern California, call Rounds & Sutter at 805-650-7100 for a free consultation over the phone or at our offices in Ventura and Westlake Village.