Reboot Your Life: Tampa Student Loan and Bankruptcy Attorney Blog
I’m sharing this here — it’s also being provided to our fellow attorneys signing up for our NACA webinar today at 2:00 p.m.
Helping your clients take their lives back from their student loans sometimes involve bankruptcy related solutions. While filing bankruptcy has typically NOT been helpful for those with overwhelming student loan debt, there is good reason for re-evaluation of that view now. Reducing student loan debt in bankruptcy has become much easier in 2024 due to two new programs rolled out by the Department of Education (“ED”).
First, many full or partial discharges of federal student loans are being awarded due to a new attestation process that went into effect in November, 2022 (the “Guidance”). The rollout of this program was initially slow, but it is quickly picking up speed. The process allows for the Department of Justice (“DOJ”) to work with ED to review and approve circumstances allowing for discharge in a process that is more transparent and consistent, with less burdens placed upon debtors by simplification of the fact gathering process. Instead of traditional discovery such at requests to produce, interrogatories and depositions, the intent is to have the debtor fill out a questionnaire and attest to the hardship and other impositions that repayment of the student loans would create. In this manner, the goal is to be much less expensive and far quicker than a traditional adversary proceeding. Using the Guidance, certain presumptions for discharge now exist that did not exist previously. Assessment of the debtors’ future circumstances and whether ED considers the debtors to have made good faith efforts to repay their student loans still occurs. Once ED reaches a recommendation in accordance with the Guidance, the Court would still need to approve of the outcome. In most circumstances, the Court would likely approve of the parties’ decision to discharge any student loan debt.
Second, a new process allowing for Income Driven Repayment (“IDR”) credit for debtors in bankruptcy will begin July 1, 2024. Rather than simply putting the debtor into forbearance, the new Bankruptcy IDR will give a debtor a month of credit toward loan forgiveness for each month the debtor makes a required plan payment under a confirmed Chapter 13 plan. 34 C.F.R. § 685.209(k)(4)(iv)(K). A debtor will receive IDR credit for a plan payment even if no IDR payment is made. Neither ED nor the debtor is required to file a proof of claim for the federal student loan(s), nor is there any requirement that ED receive any distributions under the debtor’s plan. Even if the Chapter 13 Plan is not completed, a debtor shall receive IDR credit for the successful plan payments that were made during the pendency of the bankruptcy case. This program is particularly valuable for those borrowers with high income who also have large mortgage debt or medical expenses which can be used to reduce disposable income in a bankruptcy to reduce or even eliminate a student loan payment.
Traditionally, it was nearly impossible to discharge federal student loan debt in bankruptcy under the Brunner standard. Under Section 523(a)(8) of the Bankruptcy Code, certain student loans may not be discharged in bankruptcy unless the bankruptcy court determines that payment of the loan “would impose an undue hardship on the debtor and the debtor’s dependents.” 11 U.S.C. § 523(a)(8); United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 278 (2010). This inquiry is undertaken through a formal adversary proceeding in the bankruptcy court.
The most common framework for assessing undue hardship is the Brunner test, emanating from Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987). To discharge a student loan under the Brunner test, a bankruptcy court must find that the debtor has established that (1) the debtor cannot presently maintain a minimal standard of living if required to repay the student loan, (2) circumstances exist that indicate the debtor’s financial situation is likely to persist into the future for a significant portion of the loan repayment period, and (3) the debtor has made good faith efforts in the past to repay the student loan. Id. at 396. This Brunner standard exists in the majority of states including the State of Florida. Other courts have applied a “totality of circumstances” test. The Totality Test looks to: (1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor’s and their dependents’ reasonably necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case. The new Guidance applies in both Brunner and Totality Test jurisdictions.
While the Brunner and Totality Tests still apply, the Guidance allows for an easier review by ED with the added benefit of certain presumptions of discharge. The Guidance creates presumptions that the inability to repay will persist if:
- The debtor is 65 or older;
- The debtor has a disability or injury impacting income potential;
- The debtor has been unemployed for five of the last 10 years;
- The debtor failed to obtain degree for which the loan was procured;
- The debtor’s loan has been in repayment status for 10 years.
Traditionally, these factors were not given a presumption of discharge as they are now. Of course, the presumptions are rebuttable if there is concrete evidence that the debtor would have the future ability to pay.
Moreover, starting on July 1, 2024, ED is implementing a new procedure to allow IDR credit for successful plan payments made during a Chapter 13. Sporadically, around the country, various federal districts attempted to address the “false start” generated when mortgage debt, vehicle loans and credit card debt were addressed during bankruptcy, but student loans were merely placed into forbearance while interest continued be charged, increasing the student loan debt. The typical Fresh Start that debtors receive at the end of their bankruptcy case actually turns into a False Start because the student loan debt has only grown.
Very few districts implemented student loan rules which allowed a debtor in bankruptcy to obtain credit toward forgiveness such as public service or chronic low income. Here in the Middle District of Florida, the judiciary took matters in their own hands and created the Student Loan Management Program (“SLMP”) which has been copied by various jurisdictions throughout the country. However, the vast majority of debtors have not known about the SLMP or have filed in jurisdictions where no such program exists.
So how do you evaluate whether any of the new programs in bankruptcy may help you or your client? First, you may be presented with several different loan types by a student loan client. The first thing we do during our strategy sessions is identify what loan types and balances exist. We identify any co-borrowers and the financial abilities of each borrower. We assess our client’s need for an adversary proceeding in bankruptcy or whether any non-bankruptcy program may offer a solution. We identify strategies to reduce federal versus private debt. We set expectations for our client with anticipated targets. There is so much information out there about student loan debt, we strive to simplify the debt and aim for a manageable and sustainable path forward that our client can understand. The goal is frequently to maximize forgiveness and minimize future payments while avoiding tax consequences.
Pre-bankruptcy Planning: It’s important pre-bankruptcy to ensure that the debtor’s situation will be viewed in the best possible light once the bankruptcy is filed. That means possible consolidation to a Direct Loan to take advantage of the Guidance and if needed, the lowest possible IDR repayment plan for the duration of the bankruptcy. The Guidance is available under both Chapter 7 or Chapter 13.
Any good litigator understands that controlling the facts can be helpful in future litigation. Therefore, encouraging the debtor to undertake an IDR, communicate with their servicer, consolidation etc. may all be viewed as evidence of good faith which is a major focus of the Guidance.
Evidence of good faith can include things such as:
- making a payment;
- applying for a deferment or forbearance (other than in-school or grace period deferments);
- applying for an IDR plan;
- applying for a federal consolidation loan;
- responding to outreach from a servicer or collector;
- engaging meaningfully with ED or their loan servicer regarding payment options, forbearance and deferment options, or loan consolidation; or
- engaging meaningfully with a third party they believed would assist them in managing their student loan debt.
We look for opportunities to help our client fit the criteria above to allow for discharge of his or her student loan debt.
The bottom line is while bankruptcy was usually not the solution for those with student loan debt, the landscape has changed and new programs now allow for far more discharge of student loan debt.
