Bankruptcy Law & Student Loans

For several decades, the answer to whether or not you can use bankruptcy to clear your student loans has not been clear. The presumption of the Bankruptcy Code is that student loan debt is no longer dischargeable in a bankruptcy.  Prior to 1976, student loan debt could, like most personal debts, be discharged in bankruptcy proceedings.  Since 1976, the Bankruptcy Code has been amended multiple times, each time making it more difficult to discharge student loan debt. Technically, student loan debt could still be discharged, but the debtor had to convince the court that the requirement to continue to be responsible for the debt would cause an “undue hardship” on the debtor.

Case law from 1987 defined the term “undue hardship” in what is now commonly referred to as “The Brunner Test”.  This test has proven to be an extremely difficult one to meet.  

Although the bankruptcy code has not recently been amended to remove the “undo hardship” language, there is reason to be optimistic that federally guaranteed student loan debt is now easier to discharge than it has been since 1976.  

How does the Department of Justice’s new 2022 guidance affect my student loan?

In November 2022, the Department of Justice released new guidance on how it will proceed in cases seeking to discharge student loan debt moving forward.  The Department of Justice is attempting to make it easier for student loan debt to be discharged by advising Department attorneys to stipulate to facts that demonstrate that a debt would impose an undue hardship and recommend to the bankruptcy court to discharge these debts if three conditions are satisfied:

1. The debtor presently lacks the ability to repay the loan;
2. The debtor’s inability to pay the loan is likely to continue in the future; and
3. The debtor has acted in “good faith” in the past in attempting to repay the loan.

The memorandum created by the Department of Justice outlines what they will be looking for and taking into account when deciding whether or not to stipulate to partial or full discharge of federal student loan debt.

What about my private student loans?

Unfortunately, private student loans are not affected by this new standard – only federally guaranteed student loans.

What is the process to try to partially or fully discharge my federal student loans?

You must file a chapter 7 or 13 bankruptcy petition. Once the case has been filed, a separate action called an Adversarial Proceeding must be filed within the bankruptcy process. This is like a lawsuit against the student loan company. By filing the Adversarial Proceeding, you are asking the bankruptcy judge to consider discharging all or part of the student loan debt.

The Bankruptcy Code and case law have not changed, but with the expected change of direction from the Department of Justice (who represents the United States government), it is believed that more cases will be resolved between the debtor and the Department of Justice and result in a recommendation to the Bankruptcy Judge.

Should I consider using bankruptcy to discharge my student loan?

You must keep in mind that you will be filing a bankruptcy case. If you have outstanding debts that can be discharged – such as medical debts, credit cards, personal loans, etc. – that are more than you can handle financially, then a bankruptcy filing may make sense for you.

If you do not have other debts that can be discharged and you are only worried about your student loans, the answer is not as clear. You would still need to file a bankruptcy petition and have a meeting with an assigned bankruptcy trustee. Within that bankruptcy, the adversarial proceeding would then be filed.

Is it easier now to clear my student loan debt in Vancouver, Washington, after the new guidance?

Historically, the likelihood of success has been very low. Generally, a person needed to have been permanently disabled and/or elderly with minimal to no chance of working for reasonable wages again.

With the recent changes announced in the Department of Justice memorandum, it appears that the likelihood of success has increased significantly. It will be a case-by-case decision for the Department of Justice based on the information provided by the debtor and his/her attorney. An attorney will be able to review your specific situation and advise you whether or not you may succeed under these guidelines.

The November 2022 memorandum from the Department of Justice is the most significant change to how student loans are viewed within the context of bankruptcy. We do not know exactly how the process will work nor the full requirements that will be expected of any debtor seeking to discharge their federally guaranteed student loan debt. What is apparent is that the Department of Justice has made a significant change in how they will view the attempts to discharge student loan debts going forward.

As neither the case law nor the bankruptcy code has changed, this change within the Department of Justice could change whenever a new President is elected.