The U.S. Department of Education’s (“DOE”) promise of a kinder and gentler response to complaints to discharge federal student loans in a 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 requires the submission of an Attestation Form after an undue hardship complaint is filed that at least in some cases will result in a stipulation to discharge if all the criteria are met. When it works, it 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 would have been unable to consider an undue hardship complaint due to the cost and litigiousness involved.
The procedure only applies after an Adversary Proceeding is filed. These new procedures only apply to bankruptcy cases pending or filed after November 17, 2022. The new procedure will not permit the reopening of closed cases in order to file an Adversary Proceeding hoping to qualify for the new procedure. Such cases are ineligible. At least at this point in time, the new procedure only applies to Direct federal loans, not FFEL federal loans, and no private student loans.
As a practical matter, if a debtor intends to file an undue hardship complaint, drafting the bankruptcy schedules with that goal in mind is essential, particularly the income and expense information on Schedule I and J. Similarly, if the goal is to arrive at a stipulated settlement, including within the complaint the facts necessary to meet the attestation standard just makes sense. The procedure is so new that some of the nuances of the attestation form remain unclear. While it is still a work in progress, there is some hope that the new procedures will make the undue hardship procedure available to more debtors.
Opening this process up to more debtors may require a change in perception. I attended a free student loan webinar in March of 2014 entitled “Student Loans: The Next Big Thing for the Collection Industry.” I’m not a collection lawyer but I wanted to see what collection companies were saying about my student loan clients. I submitted a written question during the webinar asking what percentage of student loans face a discharge in bankruptcy and received this response:
Bankruptcy discharges of student loans are the unicorn of the bankruptcy world
I was taken aback at first but the more I thought about the more I realized there is ample reason for this perception. The protections accorded student loans under the law exceed that provided to virtually every other creditor even the IRS. I can get rid of tax debt in a bankruptcy far easier than any student loan. These sorts of protections only encourage an arrogance in collection tactics not used by any other type of creditor. The new Attestation procedure sounds like a good first step towards changing this perception.