In Florida bankruptcies, student loan debt is very difficult to get rid of. Even filing bankruptcy that discharges other unsecured debt does not solve the problem for most student loan debtors. The Bankruptcy Code says that student loans may not be discharged unless the loan poses an “undue hardship” on the bankruptcy debtor. Courts have construed undue hardship very strictly.

For instance, a debtor who cannot afford current loan payments still cannot strip his loans in bankruptcy if the court believes there is a reasonable chance the debtor’s financial situation will improve sometime in the future. The courts have established a three-prong requirement to show undue burden: (1) that the debtor cannot maintain a minimal standard of living and make loan pavements, (2) that the debtor’s poor finances are likely to continue, and (3) that the debtor has made a good faith effort in the past to pay the loan. A small percentage of student loan debtors have been able to meet these three criteria.

In November 2022, the federal government enacted a policy to assist bankruptcy debtors in discharging federal student debt by making it easier for debtors to prove that federal loans impose an undue hardship. The U.S. bankruptcy trustee, as a representative of the Department of Justice, will work with the U.S. Department of Education ( DOE) to expedite applications for student loan discharge. Upon request, the DOE will furnish the debtor and his attorney with a loan payment history to assist preparation of a loan discharge complaint. The debtor may show undue hardship by filing an attestation, a form of an affidavit, of certain facts about his financial situation. The attestation is supposed to be reviewed expeditiously by DOE and the bankruptcy trustee.

There are three parts to a student loan discharge attestation that the DOE will consider in deciding whether to support a loan discharge. The first section of the attestation contains information about the debtor’s income, expenses, and ability to make current loan payments. The debtor can show that his current income cannot cover his reasonably basic living expenses if he has to also pay student loan debt. The debtor’s expenses under consideration are not restricted to basic subsistence expenses; the debtor can list and consider a broad range of reasonable expenses including items such as alimony, child support, daycare, preschool, etc. The amount considered as current student loan payments can be based upon a 10-year amortization schedule even if a long repayment is in place or available. If the debtor shows he cannot repay the loan on a 10-year schedule and also cover his stated expenses there is a presumption of inability to pay.

The second element of the loan discharge application is showing that the debtor will likely be unable to repay the student loan in the future.  The new DOE guidelines presume the debtor’s inability to make payments will continue if: (1) the debtor is over 65 years old, (2) the debtor did not complete the education for which the loan was incurred, (3) the student loan has been in repayment status for at least 10 years, (4) the debtor has a permanent disability or chronic injury limiting his ability to work, and (5) the debtor has been unemployed for 5 of the last 10 years. The debtor can provide additional factors he believes are relevant, and the DOE can rebut the presumption created if the debtor meets one or more of the numbered criteria.

Lastly, the debtor must demonstrate a good faith effort to repay the student loan in the past. This test examines several aspects of the debtor’s prior effort to repay the loan. Examples of a good faith repayment effort are the number and frequency of the debtor’s prior loan payments,  a prior formal application for a loan deferment, the debtor’s application for student loan consolidation, responding reasonably to the loan servicer’s collection inquiries, and the debtor’s efforts to seek employment.

The student loan discharge analysis also considers the debtor’s assets to see what assets are necessary to maintain a minimal standard of living and what assets may be sold to repay student loan debt.

The legal procedure to seek a student loan discharge is mostly unchanged. The debtor must file a formal adversary complaint separate from his bankruptcy petition. The DOJ and DOE will consider the complaint and the supporting attestation, and decide how to respond to the complaint. The government has stated its objective and expectation that in most cases the DOE will accede to the student loan discharge if it sees that the debtor’s attestation meets the new hardship standards.

The DOE guidelines have made it easier to discharge only federal student loans. The guidance does not apply to private loans. It is impossible to anticipate how bankruptcy courts will resolve issues that arise in specific cases filed under the DOE student loan guidelines. As discharge requests and filed and litigated, debtors’ attorneys will become able to predict the result of particular discharge applications.  The student loan discharge procedure is still complicated and will demand significant legal expenses to navigate. For those debtors with substantial student loan debt, the government’s new rules and stated willingness to cooperate with debtors give hope that many borrowers now have a path through bankruptcy to rid themselves of burdensome student loan debt.

Gideon Alper

About the Author

Gideon Alper is an attorney who specializes in asset protection planning. He graduated with honors from Emory University Law School and has over 15 years of legal experience.

Gideon has helped thousands of clients protect their assets from creditors. Before private practice, he represented the federal government while working for the IRS Office of Chief Counsel.

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