New Guidelines for Discharging Student Loan Debt Through Bankruptcy

Dallas—Fort Worth Bankruptcy Attorney Offers Analysis

Video Transcript:

David Shuster: 

It's very hard, if not virtually impossible to get rid of student loan debt.

Tom Mustin: 

How can recent policy changes affect your student loans? We're going to talk to attorney David Shuster about that on today's Ask the Lawyer. David, thanks for joining us.

David Shuster: 

Hey, great to be here, Tom. Thank you.

Tom Mustin: 

Well, David, there's been a change in guidelines in bankruptcy regarding student loan debt. So what's going on and what is the change here?

David Shuster: 

Well, this is fresh off the press, an announcement as far as I know was just yesterday, okay? And so the change is that when you challenge a student loan in bankruptcy to try to make it go away, the Department of Justice, Department of Education, has taken a very tough stance and it made it really virtually impossible to get rid of student loan debt. I mean, it really just doesn't happen. I mean, if the statistic is like 250,000 thousand bankruptcy cases are filed, chapter sevens, and to discharge, it could be Chapter 7s and Chapter 13s combined, but the amount of cases where they actually are able to discharge student loan debt is as low as 300. And what that means is you have to be essentially, you have to own nothing, probably be up in the age, not have any assets, and really just no prospects of earning anything and really disabled. It's really tough. It's very hard, if not virtually impossible, to get rid of student loan debt.

Tom Mustin: 

Is this separate from the student loan forgiveness plan that's currently in limbo?

David Shuster: 

Yes, it is. The student loan forgiveness plan was something that was rolled out earlier that's currently tied up in the courts, at least in a couple of states. This is separate. And so now what they're doing now is they're telling the Department of Justice, Department of Education, to not take as tough of a stance and to basically be a little bit more kinder and gentler when dealing with these cases and quite frankly, more realistic. And so the new guidelines, like I said, I just read through them, I think it was yesterday. And so if you're challenging student loan debt in a bankruptcy, instead of having the requirement of if you own a piece of property or if you have $300 a month extra, then you don't qualify for a discharge and bankruptcy of student loans. Essentially, it's as difficult to get rid of student loans as it would be for past due taxes, criminal fines, you know, potentially, child support and alimony, okay? Even if there is no realistic prospect of getting the loan discharged. So the new guidelines that they put forth have to do with the policy of the government with respect to challenging the debtor and the debtor's attorney that come into court saying, look, they can't afford it to pay all this back.

It's never going to be paid back. And so the new guidelines are putting a new standard in place, basically, where it's now more possible to make some of the student loan debt go away and to actually get granted a discharge of some or all of the student loan debt without having to be completely disabled and just not own a stitch of property.

Tom Mustin: 

So you talked about the new policy, David. How much of a difference will this make for borrowers?

David Shuster: 

Well, it's a big difference because, again, I mean, you're looking at if you want to qualify for a student loan discharge under the current guidelines before this. I mean, the bankruptcy code says that only in the case where repaying student loans would be an undue hardship is it dischargeable in bankruptcy. So it sounds pretty good, right? If this is an undue hardship on the debtor, then they can be discharged. But the way that was implemented by the Department of Justice, Department of Education, through the bankruptcy courts was this really tough standard known as the Brunner test, which said, again, you have to be practically disabled with no income capacity whatsoever to order to be able to get these student loans to go away. Okay. I mean, it has to be a really, so the new change is that you can fill out a form if they haven't made, if they've made a certain amount of money for a long time and it doesn't look like they're going to be employed at a rate that's going to be making significantly more money, then it's, again, it's a more kinder, gentler approach where the department government attorney, because it's their federally backed loans, can actually recommend to the court that these can be discharged.

This debtor has shown that they just flat don't have the ability to repay this debt. Or if they can repay or with the forms showed under these new guidelines that the debtor can pay $300 a month. And that's not going to be an undue hardship to pay that $300 a month. So he'll pay that he or she will pay that and then get a discharge of the remaining balance. Whereas under the old standard, it was all or none. If there was any ability of a debtor to pay anything, then no discharge of a hundred thousand dollars of student loan debt. Whereas now this is pretty significant. If the debtor shows some ability to repay something, then they'll grant a partial discharge is the way it reads, which is a... It's pretty exciting. I mean, it's something that has to happen because there's again it's not realistic to think that these loans are ever going to be repaid in full under certain circumstances when you have somebody with a lower income capacity, maybe they spent a hundred thousand dollars on a history degree and they're teaching part-time in a community college or something. I mean, it just can't do it.

Tom Mustin: 

And when we're talking about loans that are eligible for discharge, are we talking about federal loans only, or are there others?

David Shuster: 

This has to do with federally backed loans only. Because when you file... When you apply for a discharge of student loan debt the department of justice is the one that will come in and contest that. And so here we're just dealing with federal loans only. No changes to the bankruptcy code yet. I think they're intending on maybe that being something that happens in the future. And so I think I look at this as sort of a starting approach, like I said, for a kinder, gentler approach from the government standpoint, a kinder, gentler approach to say, wait a second, you know, here this, again, this person is on retirement income and is not disabled, could probably get a part-time job at Lowe's, but are they going to be able to repay the $150,000 parent plus loan they signed up for? You know what I'm saying? I mean, so it's more realistic, kinder, gentler, and it is exciting for borrowers who go to sleep every night thinking about how they'll just never, ever be able to repay this debt and having that anxiety and stress loom over them.

Tom Mustin: 

So who exactly is eligible for this type of loan?

David Shuster: 

Who is eligible is someone that has, in the bankruptcy parlance, if they're below median income, if the... The people that are generally, they use IRS cost of living standards. And so if under the IRS cost of living standards, if you have a household of four in a certain county, depends on where you live is how high the cost of living is. But if you have a household of four in a certain county and you make $90,000 and you can fill out this form that shows your income and expenses, then you could potentially be eligible for a discharge of student loan debt too. It depends on where you live, what those standards are, how you fill out the form, what your medical expenses are. But generally speaking, yeah, I mean, it's not going to be eligible for someone that's earning above a certain income level. They're going to... It's obviously, that's how it should be. And that's how the bankruptcy process is. It's not, a lot of people think, oh, it's just people filing bankruptcy, walking away from stuff when they... I paid my stuff. Why can't they?

Every situation is different. And so that's what this new guideline change tries to take into account is what is going on in this household? Are they owed a discharge of some of this debt? Is it fair and reasonable? You don't want them to pay back Nelnet, when they should be having this elective surgery, that is going to be needed in that, but they can't afford it. So, again, it is exciting. It is for people who will qualify for it and not just across the board.

Tom Mustin: 

Well, David, a lot of great information as always. We appreciate you joining us today.

David Shuster: 

All right. Thanks. Yeah. Enjoyed it.

Tom Mustin: 

And that's going to do it for this episode of Ask the Lawyer. My guest today has been David Shuster. If you want to ask David about your situation, call the number on the screen. Thanks for watching. I'm Tom Mustin for Ask the Lawyers.

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