The Department of Justice has just issued a new Guidance in coordination with the Department of Education (ED), that should allow bankruptcy debtors to be far more successful in obtaining discharges of their student loans. The key to the new process is bankruptcy debtors completing an Attestation Form to seek the DOJ’s agreement to settle the debtor’s undue hardship discharge proceeding.

Student loans are dischargeable in bankruptcy only because of undue hardship, and current bankruptcy court practice has made such discharges difficult to obtain while being overly intrusive in requiring personal information from the debtor. The Guidance seeks to rectify this by setting “clear, transparent, and consistent expectations” for discharge, reducing burdens on debtors by simplifying the process, and increasing the number of cases in which ED agrees to support a discharge.

To achieve these goals, the Guidance provides a more objective framework for applying the threepart test courts have used in deciding undue hardship:

For the debtor’s present circumstances, the IRS Collection Financial Standards are used to determine that the debtor cannot repay the student loans while maintaining a minimal standard of living.

For future circumstances, there is a presumption that the debtor’s inability to repay will persist if certain circumstances apply to the debtor.

For good faith, objective criteria are used in its evaluation.

Scope and Limits of the New Guidance
The Guidance process and standards are designed to reach a settlement between ED and the bankruptcy debtor to allow for the student loan’s hardship discharge.

But if a pretrial settlement is not reached, the Guidance’s standards are not binding on the positions that DOJ or ED may take later in litigating the case or on the bankruptcy court in deciding the undue hardship discharge proceeding.

The Guidance applies to Direct Loans and other loans held by ED, and not to FFEL loans held by guarantors—where the discharge is often contested by the Educational Credit Management Corporation (ECMC)—or to Perkins Loans still held by the school. ED may soon issue a similar guidance or a dear colleague letter applicable to such FFEL and Perkins loans.

The Guidance also does not apply to holders of private student loans.