You have to go back to 1975 to find a time when student loans were treated differently in bankruptcy than any other type of loan. Then in 1976, Congress passed the Higher Education Act, allowing bankruptcy discharges for student loans only if they had been in repayment for five years. After many years of lobbying by lenders, Congress completely overhauled the bankruptcy code in 2005 (known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 or BAPCPA), and one of the most onerous provisions was the elimination of student loan discharges in almost every case. Since 2005, a debtor must meet a nearly impossible burden of proving “undue hardship” to discharge their student loans in Chapter 7 or Chapter 13 bankruptcy.
Under current bankruptcy rules, debtors seeking to discharge federal student loans must file an adversary proceeding, a separate lawsuit filed in bankruptcy court, against the Department of Education (DOE) and prove that the repayment of their loans would impose an “undue hardship.” Courts have interpreted undue hardship as a very high burden that a bankruptcy debtor must meet, resulting in very few successful cases.
DOE’s New Student Loan Policy
When a debtor sues the DOE in bankruptcy court, the Department of Justice (DOJ) lawyers represent the DOE. The current administration directly influences department policy because it appoints the department heads. Under President Biden, the DOE has dramatically softened its approach to defending bankruptcy lawsuits from debtors seeking the discharge of student loans.
As directed by the DOE, the DOJ has employed a new practice to decide whether they will consent to the discharge of federal student loans in lawsuits brought by debtors. According to the DOJ, “The new process will help ensure transparent and consistent expectations for the discharge of student loan debt in bankruptcy; reduce the burden on debtors of pursuing such proceedings; and make it easier for Justice Department attorneys to identify cases where discharge is appropriate.”
How Does the New Policy Work?
The debtor MUST file an Adversary Proceeding and serve the DOJ. The debtor’s lawyer will then send an “Attestation Form” completed by the debtor to the attorney representing the DOJ. This form must address the three general areas of inquiry DOJ will consider:
Present Ability to Pay – Using standards developed by the IRS and the information provided by the debtor, DOJ will compare a debtor’s expenses to their income. If a debtor’s expenses equal or exceed their income, the debtor lacks a present ability to pay.
Future Ability to Pay – DOJ will then assess whether the debtor’s inability to pay is likely to persist. DOJ assumes a debtor’s financial circumstances will not change in the future if certain factors — such as retirement age, disability or chronic injury, protracted unemployment history, lack of degree, or extended repayment status —are present. Where such factors are not present, DOJ considers a debtor’s specific circumstances likely to prevent their future ability to repay their federal student loans.
Good Faith Efforts – The debtor must demonstrate they have made a “good faith effort” to repay their student loans. DOJ will focus on their reasonable efforts to earn income, manage expenses, and repay their loan. DOJ will consider, for example, whether the debtor contacted DOE or their loan servicer regarding payment options for their loan. DOJ will not disqualify a debtor solely based on non-payment if other evidence of good faith exists. Additionally, a debtor will not be disqualified based on not enrolling in an income-driven repayment plan where the debtor explains why they did not enroll.
In consultation with DOE, DOJ will review the information provided and determine whether to recommend discharge. Even where the relevant factors may not support a complete discharge, where appropriate, DOJ will consider backing a partial discharge.
How Do You Know If You Qualify?
For a $350 fee, Parker & DuFresne, P.A. will review your federal student loans carefully and analyze your circumstances. We will determine your present and future ability to pay and whether you have made a reasonable effort to repay your loans. We will provide you with a detailed summary, including suggested actions you can take now to increase the likelihood that DOJ/DOE will support the discharge of your guaranteed student loans in bankruptcy. We will only recommend suing the DOE if we determine you have a high probability of success.
Please note, the new DOE standard does not apply to private student loans.
What Does Parker & DuFresne Charge to Sue the DOE?
Every case is different, and P&D will assess the specifics of your case to determine the amount of time necessary to achieve the desired result. On average, the flat fee will be about $3,000 per Adversary Proceeding minus the $350 fee paid to perform the preliminary analysis.
Call or email us right now to discuss discharging your federal student loans!
