The Department of Education has just released guidance on how it will handle bankruptcy discharge requests for government backed student loan debt. And while the guidance is helpful, it’s also a bit disingenuous that it places the burden on students who believed what schools and colleges sold them as a smart financial move.
The guidance wants to provide a balance between collecting on student loans except where the loans would pose an undue hardship on the debtor.
The Department of Education desires to find its balance in collecting debts versus allow debt to be discharged. What this formula misses is the inequity of the indebtedness to begin with by schools, for-profit and nonprofit, pushing loans on consumers. It’s almost like a game of “tag, you’re it” where the consumer is the one holding the bag or hot potato.
But the July 7, 2015 letter from the Department of Education gives some hope to those seeking discharge of some student loan debt. The United States Department of Education says, it would consent to and/or not oppose undue hardship discharge of student loans where repaying the loan would impose an undue hardship on the debtor. – Source
Attorneys have been vigorous to challenge consumers who have sought to discharge their federal student loan debt even when it has been an undue hardship. But the guidance released today also let’s us know that challenging these cases has a formula for when it is NOT advantageous for the government to oppose the discharge request. The document from the Department of Education says, “If a holder determines that requiring repayment would not impose an undue hardship, the holder must then evaluate the cost of undue hardship litigation. If the costs to pursue the matter in bankruptcy court are estimated to exceed one-third of the total amount owed on the loan (including the current principal balance, any unpaid accrued interest, and current, unpaid accrued collection costs), the holder may accept and/or not oppose an undue hardship claim by the borrower in an adversary proceeding.”
It’s too early to see how many lenders “may” elect to follow this advice. But having this in writing is a good tool for consumer bankruptcy attorneys.
Undue Hardship Formula
Here is what the Department of Education has to say about what constitutes and undue hardship and thus a consent to allow the student loan debt to be discharged.
The following factors and considerations are offered as points to consider by lenders for discharge:
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- Whether a debtor has filed for bankruptcy due to factors beyond his or her control and the impact such factor(s) have on debtor’s ability to repay the student loan debt. Which includes a divorce resulting in diminution of family income, which will not realistically be reestablished.
- Whether a debtor who asserts undue hardship due to physical or mental impairment may qualify for Total and Permanent Disability Discharge (TPD) and/or other administrative discharges available. These include:
Closed School Discharge
False Certification Discharge
False Certification Ability to Benefit
Unauthorized Signature or Identity Theft
Unpaid Refund Discharge
- Veterans who have been determined by the Department of Veterans Affairs to be unemployable due to a service-connected disability.
- Whether a debtor is approaching retirement, taking into consideration debtor’s age at the time student loans were incurred, and resources likely to be available to the debtor in retirement to repay the student loan debt. Borrowers who choose to incur student loan debt at an older age, whether that debt is for themselves or a dependent (i.e,, Parent PLUS loans), should not be able to rely on their age alone and/or their entrance into retirement to prove undue hardship.
- Whether a debtor’s health has materially changed since the student loan debt was incurred.
- Whether significant time has elapsed since the debt was incurred.
- Whether a debtor’s expenses are reasonable and indicate minimization of unnecessary expenses to provide funds for student loan repayment.
- Whether a debtor had the mental and/or physical capacity to pursue administrative discharge options and/or income-driven repayment plans, if those options were not pursued, or whether a debtor had any physical or psychological factors that would have made the administrative process more burdensome to the borrower.
Here is an actual example of when the Department of Education feels bankruptcy discharge should be considered.
Facts: Borrower obtains student loans in order to complete a Master’s degree. Upon graduation she starts working and making payments. A few years after her graduation, her child becomes seriously ill, with no prospect of recovery, requiring round-the-clock care. The child’s illness is followed by a divorce, with no child support or alimony forthcoming. This set of circumstances makes the borrower unable to work full-time due to child care obligations. She works part-time, bringing in only a fraction of her full-time income. Her child’s medical expenses are also extremely high.
Analysis: The facts above show that debtor demonstrated willingness to repay her loans and did so when her resources permitted, and that her bankruptcy filing and circumstances were a result of circumstances beyond her control. Furthermore, the circumstances that caused her financial difficulties are likely to persist. The Department believes that a pattern such as this would warrant exploring some of the income-driven repayment options. If these options are not available and/or do not alleviate the financial hardship, a consent to undue hardship discharge, either in full or part, may be appropriate.
Bottom line, if the consumer and bankruptcy attorney put forward a reasonable and well documented case the student loans will create an undue hardship, the guidance offered today by the Department of Education is “If this consideration leads to the conclusion that repayment would impose an undue hardship, the holder should consent to, or not oppose the discharge, as authorized by the governing statute and regulations.”
While the Department of Education has laid out a course more bankruptcy attorneys can follow to seek a discharge of student loan debt as an undue hardship, it will take time for a smooth process to be developed. But even if the government does not allow for a total discharge of the debt, there exists an opportunity to “agree to discharge of a portion of the amount owed” and allow the consumer to get a bit of a bankruptcy fresh start.
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