New 10-Step Process Allows You to Eliminate Student Loans in Bankruptcy
The Department of Justice (DOJ) and the Department of Education (DOE) have released new Guidance that should permit bankruptcy debtors to achieve more success in getting student loans discharged in bankruptcy.
The new process requires bankruptcy debtors to complete an “Attestation Form”, which seeks the DOJ’s promise to settle the debtor’s undue hardship discharge proceeding. The process is as follows:
Importance of the New Guidance
Currently, student loans can be discharged in bankruptcy only because of undue hardship. Under today’s procedures, bankruptcy court practice has made undue-hardship discharges hard to get while, at the same time, requiring an invasive amount of the debtor’s personal information.
The Guidance sets “clear, transparent, and consistent expectations” for discharge, which reduces the burdens on debtors by simplifying the process, and increases the number of cases in which the DOE supports the discharge.
To attain these goals, the Guidance sets out a more objective structure for applying the three-part tests courts use in deciding undue hardship:
w Your Current Circumstances: The IRS Collection Financial Standards are used to decide that you cannot repay the student loans while maintaining a minimal standard of living;
w Your Future Circumstances: A presumption exists that your inability to repay will continue if certain circumstances apply to you;
w Objective, good faith criteria are used in this evaluation.
The Guidance process is designed to achieve a settlement between DOE and you to allow for the student loan’s hardship discharge. However, if a pre-trial settlement is not reached, the Guidance’s standards are not binding on the DOJ’s or DOE’s positions they may later take in trying the case or on the bankruptcy court in deciding the undue hardship discharge proceeding. In addition, the Guidance does not apply to holders of private student loans; however, if a settlement is reached granting an undue hardship discharge of federal loans, this should put pressure on private loan holders to follow suit.
First Step: Begin an Adversary Proceeding
Step one in the process to get a student loan’s discharge is to begin an adversary proceeding in the bankruptcy case seeking a declaratory judgment that the student loan debt may be discharged. This means you must file a lawsuit inside the bankruptcy case, which is subject to Bankruptcy Rules. The adversary complaint should list all student loans you owe.
Second Step: Follow-up the Adversary Proceeding Complaint
Next, the Assistant United States Attorney (AUSA) who represents the DOE should request that the DOE provide a litigation report. Along with this report, DOE will provide your account history, loan details, and, if possible, educational history. The report that DOE submits to AUSA should include facts DOE has relating to the presumptions about your future financial circumstances and whether you have made good faith efforts in repaying the loans. AUSA will provide this information to you. AUSAs and DOE will discuss each case to determine an appropriate course of action.
Third Step: Get to Know the Attestation Form and When to Submit It
The settlement process begins when you send to the DOJ the completed Attestation Form. The DOJ uses the information in this form, including your current and future financial status, to determine whether to offer you a settlement.
You should submit the finished Attestation Form to the AUSA who is representing the DOE in the adversary proceeding. Your attorneys should ask AUSAs in the local U.S. Attorney’s office when they would like to receive the Attestation. Some may agree to accept it as soon as the adversary proceeding is filed. The Guidance tells AUSAs to request the Attestation form early to facilitate prompt consideration of whether a stipulation can be reached.
Fourth Step: How to Indicate Your Income on the Attestation Form (Lines 11–13)
This information will determine whether the AUSA considers your debt has met the first factor in recommending a discharge settlement: Whether your current income and expenses indicate that you currently cannot make payments on the student loans while maintaining a minimal standard of living.
You report on Line 11 your household gross income, including Social Security and unemployment benefit payments. If the amount is the same, you can use the amounts listed in Schedule I if that schedule was filed no more than 18 months before filling out the Attestation. You check a box on Line 12 indicating the form of employment income verification (i.e. tax returns, paystubs, etc.) that you’ll attach to the Attestation and
describe in Line 13 the information submitted to verify non-employment income.
Fifth Step : How to Indicate Your Expenses on the Attestation Form (Lines 14, 15, and 17)
On Attestation Form Line 14(a), check “yes” or “no” for expense categories as to whether your expenses are below dollar amounts set out on the form for your family’s size. The dollar amounts are based on IRS National Standards for food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous.
If your expense item is below the standard, the AUSA will need no further inquiry and the listed dollar amounts are sufficient. If your actual expenses are greater than the expense standard, the AUSA in consultation with the DOE should consider whether you have a reasonable explanation for the added expense and may allow it. You report excess expenses on Line 14(c) and should include an explanation of why these expenses are necessary.
Lines 15(d) and 15(e) are where you report actual expenses for housing, utilities and transportation. A cap as to the reasonable level of these expenses is included by the IRS Local Standards. If your expenses exceed the IRS Local Standards, then you should provide an explanation, probably on Line 15(f)(viii), as to why the excess amount is needed to operate the auto, such as the need to travel a long ways to get to work and the high cost of gas. The AUSA and DOE should carefully consider and accept your reasonable explanation and allow the additional expense.
You can also list on Line 15(f) your actual monthly expenses for some of the IRS Other Necessary Expenses categories, if they aren’t deducted from you pay, and if they are necessary, reasonable in amount, and actually paid. Examples include alimony and child support payments; baby-sitting, nursery and preschool costs; health insurance; life insurance; delinquent taxes; payments on other student loans; and so on. Line 15(f)(viii) allows you to list and explain other necessary expenses that don’t fall within specific categories such as health care costs not covered by health insurance.
You are allowed to list most payroll deductions, such as taxes, Social Security, health insurance, and union dues, as a household expense in Line 15(a). The Attestation says you can refer to the amounts for the same deductions that were listed on Schedule I or Forms 122A-2 and122C-2.
The Guidance acknowledges that you may have actual expenses that are lower than needed for a minimal standard of living. Also, that you may be passing up some expenses due to circumstances that you’re working to resolve. Likewise, you may be limiting necessary expenses.
The Guidance says that the AUSA should not merge expenses you’re passing up with your ability to make student loan payments. What’s more, it should use your projected expenses in evaluating present and future financial circumstances. If the projected expenses do not go above the Local Standards for those items, the AUSA need not look any further.
In Line 17, you have the opportunity to identify and explain projected expenses that you would incur if you’re able to address unmet or insufficiently provided for needs.
Sixth Step: Your Current Ability to Pay the Student Loan (Line 16)
You deduct the allowed expenses from gross income and list the monthly remaining or net income on Line 16. If your expenses exceed your income and $0 is in Line 16, the AUSA should conclude that you cannot currently repay the student loan. On the other hand, if the amount listed on Line 16 is enough for you to make full student loan payments, then no recommendation for settlement will be made. If you can pay some part of the full payment, the AUSA should consider a partial discharge.
These last two analyses require that the correct student loan payment amount be used. The Guidance says the monthly payment amount is typically based on a repayment period of ten years.
You are also asked to list the correct monthly payment for the loan in Line 6. Plus, the month and year when the loan is scheduled to be repaid or when the loan went into default. You’ll find the loan’s outstanding balance in Line 5.
Seventh Step: Meeting Your Future Inability to Repay Standard (Lines 18 and 19)
The AUSA will consider whether you’ll be able to pay your student loan in the future. If you indicate on the Attestation that one or more of the following circumstances apply, the presumption is that your inability to repay the loan will continue:
- You are 65 years old or older;
- You have a disability or chronic injury that makes an impact on your income potential;
- You have been out of work for at least five of the last ten years;
- You have failed to get the degree for which the loan was obtained;
- The loan has been “in payment” status for other than “in-school” for at least ten years.
The second presumption – disability – doesn’t have to be total or permanent. You may, but are not required to, submit information from your physician to show that you have a disability or chronic injury. However, the presumption may exist even without a formal medical opinion.
The fifth presumption – the ten-year period that the loan has been in payment status – includes periods when you have been in forbearance or taking part in income driven repayment plans. The only exclusion is when you were enrolled at least half-time at an eligible school, called an in-school deferment. For consolidation loans, the time you were in repayment on the original underlying loans counts toward the ten-year period.
If one or more of the five presumptions apply, you check all applicable boxes on Line 18. For certain factors, you describe the condition and how it affects your ability to work. This may require that you disclose highly sensitive personal information. As such, the Attestation should not be attached to the Adversary Complaint that is filed with the court.
The five presumptions in the Guidance are rebuttable. However, the Guidance says that circumstances supporting rebuttal “will likely be uncommon” and “must be based on concrete factual circumstances” – and “[m]ere conjecture about the debtor’s future ability is not enough.” If more than one of the presumptions applies to you, then this should make the presumptions more difficult to rebut. Any presumption applies only to settlement discussions and cannot be used in bankruptcy court at trial.
You can show your future inability to pay by relying on more than just the presumptions. You can describe other facts and circumstances on Line 19.
Eighth Step: Meeting Your Good Faith Attempt to Repay Standard (Lines 20–26)
The AUSA will offer a settlement only if you have shown a good faith attempt to repay your student loans. The Guidance states that good faith may be shown in many ways and that the good faith inquiry should not be used as a way for courts or DOJ lawyers to impose their own values on your life choices.
In the alternative, evidence of your bad faith would deny you a discharge settlement, such as when you have purposely created a hardship or abused the system by fraudulently acquiring student loans.
The Guidance outlines objective factors that show good faith, if you can establish that you have taken at least one of the following steps:
w Making a payment;
w Applying for a deferment or forbearance;
w Applying for an income driven repayment plan;
w Applying for a federal consolidation loan;
w Responding to outreach from a servicer or collector;
w Engaging in a meaningful way with DOE or their loan servicer, regarding payment options, forbearance and deferment options, or loan consolidation; or
w Engaging in a meaningful way with a third party you believe would help you manage your student loan debt.
You can provide information about several of these factors in Lines 21 to 25. Since the form does not have specifics for some of the factors, you should describe these efforts by responding to the general question in Line 26. Some of the facts that can be reported about your good faith in Lines 21-26 may be found in the litigation report that the DOE will prepare.
The Guidance gives AUSAs discretion to consider other circumstances that could override evidence of your good faith. These include your efforts to find employment, increase income and reduce expenses. In weighing good faith considerations, employment, income and expenses are reviewed on a case by case basis and may depend highly on your family, community, and individual circumstances.
The Guidance says that bad faith should not be found where you may not have meaningfully engaged with the repayment process due to possible misinformation, wrongful income dependent repayment plan determinations, or a lack of adequate information or guidance. AUSAs should not look only at the recent loan history but instead should consider the entire life of the loan.
The Guidance advises AUSAs that evidence that you lacked financial means to pay should be considered when determining good faith. The DOE may not have complete records about your loan history, and this lack of data should not negate your evidence of payments.
The fact that you didn’t enroll in an IDRP (income driven repayment plan) by itself does not show a lack of good faith. Instead, the AUSA is expected to consider your response in Line 25 and should accept any reasonable explanation or evidence supporting your non-enrollment in an IDRP. AUSAs should not oppose discharge where your IDRP non-enrollment was not a willful attempt to avoid repayment.
Ninth Step: Listing Your Assets (Lines 27–32)
You are required to describe your assets in Lines 27–31. The Guidance does not rely upon the Schedule A/B that you have filed in the bankruptcy case. Although Lines 27–31 do not leave space for you to describe hardships if you’re forced to liquidate assets, that information should be provided in Line 32, which permits you to describe additional circumstances that support discharge.
The Guidance provides that AUSAs may consider your assets, but they should not give too much weight to the existence of assets that are not easily converted to cash or are otherwise critical to your well-being. AUSAs should be cautious in concluding that the existence of real property or other financial assets demonstrates a lack of undue hardship. As far as exempt property, such as a home or retirement funds, the Guidance states that AUSAs should be careful in considering this property in the undue hardship analysis.
Tenth Step: The AUSA’s Recommendation and the Process Conclusion
The AUSA makes a recommendation on settlement consistent with the Guidance standards, based on your present and future financial circumstances and your good faith in attempting to make payments on your student loan. The AUSA then submits the recommendation, along with DOE’s recommendation, under the standard procedures applicable in that attorney’s component.
If a recommendation to settle the case is approved, the DOE and you stipulate to the facts demonstrating that a debt would impose an undue hardship and recommend to the court that your student loan be discharged. Although the Guidance says the stipulation is not binding on the court, bankruptcy courts usually approve consent judgments entered into by the parties in an adversary proceeding.
The AUSA might offer a partial discharge. While some courts have held that the Bankruptcy Code does not authorize granting a partial discharge, other courts have found that a debtor who has some future earnings potential may receive a partial discharge. The Guidance recognizes that in circumstances where the debtor has some repayment ability, including when a debtor may be able to liquidate assets to pay a portion of the debt, a settlement that provides a partial discharge may be appropriate, if not contrary to controlling case law.
While a partial discharge may seem attractive to a debtor who has an excessive amount of student loan debt, debtor attorneys should be cautious in recommending a partial discharge settlement when there are doubts about the debtor’s future earning capacity or a risk of large future expenses. Debtors should also avoid consenting to a conditional judgment that provides that the entire debt will spring back and become nondischargeable if the debtor fails to make agreed-upon scheduled payments on the portion of the debt not discharged.
If a settlement cannot be reached with the DOJ, you can proceed with the adversary proceeding and see if the bankruptcy court will grant the hardship discharge even where the DOJ was unwilling to settle.
Richard Fonfrias, J.D.
Chicago’s Financial Rescue
& Bankruptcy Lawyer
Fonfrias Law Group, LLC
If You Have Questions About Citations, or Other Legal Matters, Don’t Hesitate to Call 1 (312) 969-0730