The U.S. Department of Education’s (“DOE”) promise of a kinder and gentler response to complaints to discharge federal student loans in bankruptcy has been long awaited and may have arrived. On November 17, 2022, DOE announced a radical departure in how it will analyze these types of cases. The new procedure can result in DOE agreeing to a stipulation to discharge of all or part of a debtor’s federal student loan after consideration of an attestation form. Although an Adversary Proceeding still needs to be filed, the process when it is successful will avoid the time and expense of a trial. It’s expected to open this process up to a whole new group of debtors who in the past believed they could not afford an undue hardship complaint. No longer will DOE tell its lawyers to oppose undue hardship complaints just because a debtor has the ability to fund an income-driven repayment plan (“IDRP”) on the theory that it could not possibly be an undue hardship if a reduced payment plan were possible. DOE’s attempt to substitute one for the other has enmeshed many debtors in expensive litigation even when there were sympathetic facts. One recent example out of Massachusetts Bankruptcy Court is Carney v. Educational Credit Management Corp., AP 20-4039 (Mass. Bk Ct. March 23, 2023). There, the court considered a discharge for a debtor with more than $200,000 in federal student loans with net monthly income of only $2,000. These were FFEL federal loans which currently are not covered by the new attestation procedure. After DOE got debtor to admit the reduced IDRP payment was affordable, Judge Panos held there was no undue hardship despite the fact the IDRP would take 25 years to complete and could result in taxable forgiveness of debt. Since the ability to pay is a factual issue only resolvable at trial, DOE’s resort to this argument has historically led to protracted litigation. This made the process so expensive that only the most desperate or highly motivated debtors had the temerity to take the plunge.
As of January, 2023, there were 43.5 million student loan borrowers owing $1.63 trillion in federal student loans, second only to mortgages as the largest consumer debt in America. Many economists believe the amount of student loan debt in this country has created a serious drag on the economy, preventing many borrowers from purchasing a home or starting a business. One study found fewer than 1% of debtors eligible to file an undue hardship complaint actually did so. There is a perception that the debtors most likely to succeed are the ones least likely to be able to afford the process.
The early returns in New Hampshire are promising. In one 2022 case pending in New Hampshire Bankruptcy Court as of November 17, 2022, the Department of Education agreed that the debtor had met all of the criteria required by the Attestation Form. The Attestation Form is basically a 15 page affidavit similar to an expanded tax return that also includes the disclosure of expenses and other facts such as age, disability and unemployment history. These can create certain presumptions that will preclude a debtor from having to prove present financial circumstances will persist into the future, so as to avoid the sort of crystal ball gazing that makes a trial on an undue hardship complaint a daunting task. In this case DOE stipulated to a complete discharge of all federal student loan debt. Walsh v. Dept. of Educ., AP No. 22-01009, (NH Bk. Ct., final judgment entered 2/9/23). In another Adversary Proceeding, again filed prior to November 17, 2022, the Department of Education agreed to a partial discharge of federal student loan debt, based on the Attestation Form procedure. Thompson v. US DOE, AP No. 20-01016 (N.H. Bk. Ct., agreement filed 3/16/23). These type of summary dispositions are encouraging that this process is working.
Adversary Proceedings are still required for DOE to consider an attestation request. Debtors with closed cases will not be able to reopen them in order to file Adversary Proceedings as these cases are not eligible. The cases need to be filed or pending as of November 17, 2022. As of the writing of this article, this procedure only applied to Direct federal student loans, and did not apply to FFEL loans. The inapplicability of this procedure to FFEL loans was exactly what led to the poor outcome in the Carney case. The debtor’s payment under a standard repayment plan in Carney would have been $1,500 per month, an amount the court acknowledged the debtor could not afford. It is very likely the debtor in this case would have qualified for the new the attestation procedure if it had applied to FFEL loans. Although Judge Panos left open the possibility of revisiting his decision, consolidating a FFEL loan into a Direct loan would not make this debtor eligible for the attestation procedure because the new loan would become a post-petition debt and not part of a debtor’s bankruptcy.
The Attestation form tracks the Brunner test, first adopted by the 2nd Circuit, even though this test is not accepted in every circuit. Presumably DOE wanted a national form that did not vary from jurisdiction to jurisdiction. The First Circuit has not adopted the Brunner test or any other test for that matter. The trial courts here generally follow the totality of the circumstances test. The principal difference between the two is that the Brunner test requires a showing of good faith payments while the totality of the circumstances test does not. If a debtor has made no payments, never applied for an income driven repayment plan, a forbearance or a deferment, it may be difficult to demonstrate the good faith required by Brunner. If the failure to enroll in an IDRP is due to misinformation or a concern over the tax consequences, it is an open question whether DOE will be flexible enough to relax this requirement. Beyond the good faith payment question, both tests focus on whether a debtor can show an inability to maintain a minimal standard of living if forced to repay the loan and that this problem is likely to persist over the life of the loan. Assets may be considered by the Department of Education and the exemption of those assets in a bankruptcy does not necessarily preclude them from being considered as part of the Department of Education’s decision to offer a stipulated judgment.
One California bankruptcy judge in discharging a student loan excoriated the bench and the bar for helping to create the hesitancy in pursuing undue hardship complaints, stating:
It is now time to demythologize unwarranted and fallacious dogmas and propaganda that have encrusted, ossified, neutralized, and transmogrified § 523(a)(8) analysis into a misconception that student loan debt is virtually impossible to discharge, even though the “undue hardship” standard of proof is preponderance of evidence and the standard of appellate review is “clear error.”
Love v. Dept of Educ., 21-02045 (E.D. Cal. Bk Ct. April 5, 2023). The new attestation procedure is a good first step towards changing this perception.