The U.S. Department of Justice (DOJ) has released guidance to its attorneys regarding requests to discharge student loans in bankruptcy cases. The 16-page memorandum developed in coordination with the Department of Education (DOE) advises DOJ attorneys to “recommend to the court that a debtor’s student loan be discharged if three conditions are satisfied: (1) the debtor presently lacks an ability to repay the loan; (2) the debtor’s inability to pay the loan is likely to persist in the future; and (3) the debtor has acted in good faith in the past in attempting to repay the loan.” According to the press release accompanying the guidance, “[t]he new process will help ensure consistent treatment of the discharge of federal student loans, reduce the burden on borrowers of pursuing such proceedings and make it easier to identify cases where discharge is appropriate.”
Under current case law, student loan borrowers requesting discharge of their loans must demonstrate that they would suffer “undue hardship” unless the debt is discharged, a challenging standard to meet and one that varies according to the jurisdiction. To make this determination, bankruptcy courts typically review the borrower’s past, present and future financial circumstances. The new process will leverage DOE data and a new borrower-completed attestation form, addressing the factors such as ability to pay and good faith efforts. The DOJ will then review the information provided, apply the above factors, and determine whether to recommend that the bankruptcy judge discharge the borrower’s student loan debt. “By simplifying the process and establishing clear standards, the agencies hope to significantly reduce the burden on borrowers and government attorneys, provide a clear path for borrowers to seek discharges and add safeguards to promote consistency and predictability.” While courts are not required to follow the DOJ’s recommendations, the DOJ’s position is likely to be highly persuasive.
The new DOJ guidance may blunt some of the impact if the Biden administration’s student loan forgiveness program is overturned. As discussed here, on December 1, 2022, the Supreme Court announced it will hear full arguments on the six-state challenge to the debt relief program this February. Until then, the Eighth Circuit’s nationwide injunction on the program remains in place. On November 22, 2022, the Biden administration announced it would be extending the student loan repayment pause. Student loan payments are now set to resume 60 days after the debt cancellation program is implemented, 60 days after the lawsuits are resolved, or 60 days after June 30, if litigation fails.
Troutman Pepper will continue to monitor for developments.
