Discharging Student Loans in Bankruptcy in 2023

January 28, 2023

There are finally significant changes to how student loans are discharged in bankruptcy. They come from new guidelines for the Department of Justice (DOJ) attorneys representing the Department of Education (DOE) when someone asks to discharge their student loans. These new guidelines give bankruptcy attorneys like us assurance that when these rules are met, the DOJ will not oppose the discharge of student loans:

Discharging Student Debt in Bankruptcy Before the New Guidelines

struggling with student loans

For years, it has been extremely difficult to discharge student loans in bankruptcy. The rules weren’t that complicated but proving that you met them was very difficult. Essentially, the rules aren’t changing that much; It is just much clearer how we can show that you can satisfy them. 


Previously, we found that this was an expensive, lengthy and uncertain process. It could also be very intrusive because the DOJ attorneys could request all kinds of information under the “discovery” process. It felt very much like an invasion of your privacy. Plus it was not clear what we could provide to the DOJ to get them to agree that you should be able to discharge your student loans. So, facing a long and expensive legal battle that could involve looking into private matters, most people simply chose not to try to discharge their student loans. 


The rules then and now required three things- 

  • You were unable to support yourself and your dependents and have money left over to make your student loan payments;
  • Your situation was unlikely to change; and 
  • You had made a good faith effort to pay your student loans. 


We found that these rules were fairly loose and subject to interpretation. There were no clear guidelines on how to prove that you met these tests. And basically the DOJ and the DOE were instructing the attorneys handling these cases to oppose most requests.


Biden Administration, Department of Education and the Department of Justice


The Biden Administration has been trying to make changes to the student loan system including proposing limited debt forgiveness for some student loans. The new guidelines shouldn’t be confused with the forgiveness program. It drew a lot of immediate political opposition. Lawsuits were filed that will put the program on hold while the issues are worked out in Court.

The new guidelines are internal. They are simply the Biden Administration’s Department of Education giving the Department of Justice new instructions on how to handle requests for bankruptcy discharges of student loans. Therefore, it is all inside the Biden Administration where they have a lot more discretion, so it is unlikely that these new guidelines will be subject to the same kind of litigation as the student loan forgiveness program.

Changes Made by the New Guidelines

Now there are clear instructions to the Department of Justice on when it should not oppose your request to discharge your student loans in bankruptcy. This means that we are able to give you better advice about your individual situation. If you meet them, we can be much more confident that your student loans will be discharged. 


To prove that you meet the first test, that you can’t afford to pay your student loans, we now will be able to use the IRS Collection Standards for your expenses. These are developed by the IRS for tax collection cases and will now be used in this process to determine if you can maintain an adequate standard of living and have money left to make your student loan payments. These standards are regularly updated and published so we can see exactly what they are and how they apply to you.


You can see them yourself by going to these links. 

https://www.irs.gov/businesses/small-businesses-self-employed/oregon-local-standards-housing-and-utilities 

https://www.irs.gov/businesses/small-businesses-self-employed/national-standards-food-clothing-and-other-items 

https://www.irs.gov/businesses/small-businesses-self-employed/local-standards-transportation 

 

https://www.irs.gov/businesses/small-businesses-self-employed/national-standards-out-of-pocket-health-care 

 


Remember that the standard for medical expenses is a floor, not a ceiling, so you will be allowed your actual medical, prescription and dental expenses as well as any health, etc insurance. Also, taxes and business expenses are allowed. 


These allowable expenses are compared to your household’s gross income. If they exceed it, this test is met. The guidelines say that for this gross income information we can use the same income figures as were (or would be) filed in your bankruptcy schedules. 


If you have some income after the allowable expenses but it is not enough to pay the student loans, you might qualify for a partial discharge. 


For the second test, whether this situation is likely to continue, there is a presumption that will apply if any of five conditions exist: 

  1. You are older than 65; 
  2. You have a disability or chronic illness or injury; 
  3. You have been unemployed for 5 of the last 10 years; 
  4. You failed to obtain the degree for which the student loans was incurred; or 
  5. The loan has been in a payment status other than “in-school” for ten years. 


These are not intended to be hard and fast rules but, as the name suggests, they are guidelines, so you might still qualify even if you don’t meet the exact terms of these criteria. For example, if you have been chronically unemployed, even though you have worked on and off over the last ten years. 


For the third and final test, whether you have made an effort to repay your student loans, the guidelines list seven ways to show that you have:

  • Making a payment or payments
  • Applying for forbearance or a deferment
  • Applying for an income driven repayment plan (IDRP)
  • Applying for a federal consolidation loan
  • Responding to contact from a servicer or collector
  • Engaging meaningfully with the Department of Education or a servicer about repayment options
  • Engaging meaningfully with someone or an agency that you believed would help you deal with your student loan

What This Means for Borrowers

For borrowers, it means that if you meet the guidelines, the Department of Justice will stipulate to the facts supporting a discharge of your student loans. You will have a much better chance of discharging them if the DOJ has stipulated to these facts. 


In turn, this means the realistic possibility of relief in Bankruptcy Court from overwhelming student loan debt. It means that you too might get a fresh start by discharging your student loans. 


This gives student loan borrowers a real chance for a normal financial life. It means considering things that seemed out of reach, like buying a home,  saving for your retirement or starting a family. It lets us give you the benefits of bankruptcy, like relief from your biggest debt and the ability to rebuild your credit, which previously really were not available to people with significant student loans, are now within the realm of possibility.


Contact a Bankruptcy Attorney About Discharging Your Student Loans

Bankruptcy itself can be complicated and these new guidelines are even more so. But an experienced, dedicated and thorough bankruptcy attorney can make a difference. 



We evaluate your situation and if you meet the three tests, we will help you complete the required attestation and ask the DOJ to stipulate to the crucial facts. We would then present the Order to the Court and advocate for the discharge of the student loans before the Bankruptcy Judge.


Contact us to set up a phone appointment to discuss your situation. We can discuss the guidelines and evaluate whether you might be eligible, all in a free consultation.


Also, if you like, you can email us at info@oregon-attorneys.com  to get a free copy of the 16 page Department of Justice “GUIDANCE FOR DEPARTMENT ATTORNEYS REGARDING STUDENT LOAN BANKRUPTCY LITIGATION” with many details about the issues discussed in the Blog post.


It is also available at https://www.justice.gov/civil/page/file/1552681/download 


There DOJ press release about the new guidelines is available at https://www.justice.gov/opa/pr/justice-department-and-department-education-announce-fairer-and-more-accessible-bankruptcy 


We want to help you learn if you might be able to discharge your student loans. You deserve to know if this important opportunity might be right for you. But don’t wait. A new administration could issue new guidelines in the future that go back to the old system of making a student loan discharge very difficult to receive in bankruptcy.

Discharging Student Loans in Bankruptcy in 2023 FAQ's

  • Does bankruptcy clear student loans?

    Bankruptcy doesn’t automatically discharge student loans. They are not discharged unless you ask the Court to discharge them. The new guidelines mean that if you meet certain requirements, the attorneys for the Department of Education will not oppose your request. This makes it much more likely that the Court will approve it.

  • Who is eligible for student loan discharge?

    Anyone filing bankruptcy who has student loans and meets the new guidelines is eligible to request a discharge using them. We can evaluate your individual situation in a free consultation and let you know if you might be eligible for a student loan discharge.

  • Can the Biden Administration make these new guidelines permanent?

    No, because they are simply internal instructions from the Department of Education to its Department of Justice. The guidelines could easily be changed again by the next administration, so this opportunity to discharge your student loans could easily be gone in 2025.

Bankruptcy Myths Debunked: Separating Fact from Fiction

September 5, 2024
Learn the truth behind some of bankruptcys most common myths. From the facts about filing, credit impact, and how bankruptcy can offer a fresh financial start.

8 Ways to Rebuild Your Credit After Bankruptcy

February 20, 2024
Bankruptcy is the first step to rebuilding your credit so here are some tips to repair and build your credit and improve your credit score after bankruptcy.
debt relief attorney

How to Prepare for a Meeting With a Debt Relief Attorney

November 1, 2023
There are a few ways you can prepare for a meeting with a debt relief attorney. Keep reading or contact us today to learn more.

The Different Types of Bankruptcy

By 7016608589 • February 28, 2023
What are the different types of bankruptcy? Which types should you consider filing? Chapter 7 and Chapter 13 are best for most people but companies and people with a lot of debt may need Chapter 11.
Wage Garnishment

Oregon Garnishment Laws

By Stephen Behrends • August 15, 2022
My paycheck is being garnished. How does wage garnishment work? How much can they take? I can’t pay my rent or other bills. How can I stop a garnishment?
bankruptcy attorneys

5 Common Reasons People Have to File for Bankruptcy

July 13, 2022
Have you acquired unnecessary debts and are unsure of what to do? Read this blog to learn when it's time to call bankruptcy attorneys for legal assistance.

Chapter 7 vs Chapter 13 Bankruptcy

By Steve Behrends • July 12, 2022
What are Chapter 7 and Chapter 13? Which one should you file? Is one better? Can the Court make you file Chapter 13 if you want to file Chapter 7?

Bankruptcy Attorney Q & A- (Part 2) How Soon After Bankruptcy Can I Get an FHA Loan and Buy a House?

By Judson Carsuone • May 11, 2022
Bankruptcy Attorney Q & A- (Part 2) How Soon After Bankruptcy Can I Get an FHA Loan and Buy a House? Clients frequently ask about future credit after bankruptcy and especially about if they will ever be able to buy a home. The answer to this question is not always as simple as it should be because it varies by the type of home loan. This blog addresses special mortgages backed directly by the federal government such as Federal Housing Administration first time home buyer and rehabilitation loans. If you do not qualify for one of these loans, you should read our related blog on conventional mortgages and buying a home after bankruptcy. Just paste this link into your browser window: https://www.oregon-attorneys.com/bankruptcy-attorney-q-a-how-soon-after-bankruptcy-can-i-buy-a-house The short answer is that a waiting period of one to three years after filing for bankruptcy is all that is required for Federal Housing Administration, Veterans Administration and US Department of Agriculture Rural Home Loans. But this is just as to the bankruptcy filing. Of course, you still need to take active steps after bankruptcy to rebuild your credit. Check out our blog posts on rebuilding your credit after bankruptcy https://www.oregon-attorneys.com/5-steps-to-rebuilding-your-credit https://www.oregon-attorneys.com/filing-bankruptcy-is-just-the-first-step-in-rebuilding-your-credit And, you have to have sufficient income, possibily a down payment and a good debt to income ratio to buy a house. A Chapter 7 or Chapter 13 bankruptcy will show on your credit report for 10 years and negatively affect your credit. However, loans targeted to special populations and backed by the federal government have rules that allow you to buy a home shortly after discharge. These rules are subject to change so we recommend that you consult a mortgage broker for the most up to date standards for qualifying. Here are the waiting periods for these loans so you can buy a house. ● If you otherwise qualify for an FHA loan, you must wait at least 2 years after a Chapter 7 discharge or 1 year after a Chapter 13 discharge. ● If you otherwise qualify for a VA loan, you must wait at least 2 years after a Chapter 7 discharge or 1 year after a Chapter 13 discharge. ● If you otherwise qualify for a USDA loan, you must wait at least 3 years after a Chapter 7 discharge or 1 year after a Chapter 13 discharge. In addition, if you are in a Chapter 13 plan and you need to refinance, then FHA and VA can also help you. FHA loans used to refinance a home while in a Chapter 13 bankruptcy require up to 2 years of on time payments to the Chapter 13 trustee. You must also meet the other loan standards such as sufficient income and appropriate loan to value ration. But the loan proceeds must allow you to conclude your Chapter 13 plan as of the closing of the loan. We sometimes call this buying out your plan. This can work well if you have the equity. It is also possible to use VA loans to refinance a home while in a Chapter 13 bankruptcy. You need up to 2 years of on time payments to the Chapter 13 trustee. You must also meet the other loan standards such as sufficient income and appropriate loan to value ration. But you do not need to buyout your plan. Here is a brief description of these home loans. ● FHA first time home buyer loans allow for a low down payment currently at 3.5% with a credit score at or above 580, or 10% if your credit score is between 500-580. The property needs to pass an inspection. And there is a cap on these loans that varies by county. For example, a home in Lane County can qualify up to $420,000 but in Multnomah County that amount is $598,000. ● FHA rehabilitation loans have similar standards. However, the loan can include cash out to bring the home up to the required inspection standards. The cash out is limited to $35,000 for qualifying improvements such as replacing roofing, enhancing accessibility for a disabled person or making energy conservation improvements. ● VA loans for new home purchase start with a Certificate of Eligibility (COE) to show your lender that you qualify based on your service history and duty status. This is obtained from the VA. The VA does not always require a down payment but one may be needed depending on the amount of the loan. The property needs to pass an inspection. But unlike the FHA, the VA does not set standards for the loans as to credit or income. Typical lenders do want minimum credit scores in the 600 range. ● USDA rural home loans do not require a down payment. But the home and its location are essential to obtaining this type of mortgage. For example, the house size is usually 2000 square feet or less. In fact, the home buyer must need the home to have decent, safe, and sanitary housing and be unable to obtain a loan from other resources on terms and conditions that can reasonably be expected to be met. Income qualifications are lenient as the loan can include a payment subsidy and are only available to low income borrowers. The USDA doesn't have a fixed credit score requirement, but most lenders require a score of at least 640, and 640 is the minimum credit score you'll need to qualify for automatic approval through the USDA's automated loan underwriting system. Conventional loans require a longer waiting period between bankruptcy discharge and requesting a home loan. These types of loans are not guaranteed by the federal government and can require significantly longer waiting periods. But your state or local government may have other programs that can also help. And a bank involved in the Community Reinvestment Act (CRA) will also have loans available for low to moderate income home buyers. Finally, if you were impacted by recent fires and lost your home in such a disaster, the Small Business Administration and FEMA may have loan options to rebuild. Filing bankruptcy is usually just the first step to rebuilding your credit and putting yourself back on track to possible home ownership in the future.

Bankruptcy Attorney Q & A - How Soon After Bankruptcy Can I Buy a House?

By Judsone Carusone • May 11, 2022
Bankruptcy Attorney Q & A - How Soon After Bankruptcy Can I Buy a House? Clients frequently ask about their future credit ratings after bankruptcy and especially about being able to get a mortgage to buy a house. The answer to this question is not always simple as it varies by the type of mortgage. This blog addresses conventional home loans. If you qualify for a FHA or VA loan, you should read our related blog. Just pasted this link into your browser window https://www.oregon-attorneys.com/bankruptcy-attorney-q-a-part-2-how-soon-after-bankruptcy-can-i-get-an-fha-loan-and-buy-a-house The majority of conventional home loans are sold with in 6 months by the original lender. Fannie Mae and Freddie Mac are the largest purchases of these home loans, buying upwards of 65% of the annual home loans. We call this the secondary mortgage market. The rest of these loans are purchased by banks, hedge funds and asset backed trusts. Over the life of a 30 mortgage, it may be sold several times. A bankruptcy or other major negative credit event will create a waiting period before you qualified for a home loan that can be purchase by Fannie Mae or Freddie Mac. Many original lenders want the home loans qualified for purchase by Fannie Mae and Freddie Mac. So they try to meet Fannie Mae and Freddie Mac standards in all cases. Here are the waiting periods for these home loans to be qualified for purchase by Fannie Mae and Freddie Mac. • A Chapter 7 or Chapter 11 Bankruptcy waiting period is 4 years from the discharge or dismissal date of the bankruptcy action. A 2 year waiting period is allowed if extenuating circumstances are documented. • A Chapter 13 Bankruptcy waiting period is 2 years from the discharge date or 4 years from the dismissal date. This shorter waiting period after discharge recognizes that borrowers have already met a portion of the waiting period within the time needed for the successful completion of a Chapter 13 plan. A borrower who was unable to complete the Chapter 13 plan must wait 4 years. A 2 year waiting period is allowed if extenuating circumstances are documented as to a dismissed case. • A borrower who filed more than one bankruptcy within the past 7 years has a 5 five-year waiting period from the most recent dismissal or discharge date. However, two or more borrowers with individual bankruptcies are not cumulative, and do not constitute multiple bankruptcies. For example, if the borrower has one bankruptcy and the co-borrower has one bankruptcy this is not considered a multiple bankruptcy situation requiring a 5 year waiting period. A 3 year waiting period is allowed if extenuating circumstances are documented and is measured from the most recent bankruptcy discharge or dismissal date. But the most recent bankruptcy filing must have been the result of the extenuating circumstances. You still need to rebuild your credit and avoid accumulating a lot new debt to before you can buy a house. And you have to have sufficient income and a good loan to value ratio to buy a house so you can meet the standards to qualify for a home loan. Check out our blog posts on rebuilding your credit after bankruptcy. Just paste these links into your browser window: https://www.oregon-attorneys.com/5-steps-to-rebuilding-your-credit https://www.oregon-attorneys.com/filing-bankruptcy-is-just-the-first-step-in-rebuilding-your-credit These bankruptcy waiting periods may or may not be better then the alternatives. Here are the waiting periods for non-bankruptcy major negative credit events. • Foreclosure requires a 7 year waiting period measured from the completion date of the foreclosure action as reported on the credit report or other foreclosure documents provided by the borrower. A 3 year waiting period is allowed if extenuating circumstances are documented. • Foreclosure and Bankruptcy on the Home Loan. If a home loan was discharged through a bankruptcy, the bankruptcy waiting periods is applied if the new lender can document that the mortgage obligation was discharged in the bankruptcy. Otherwise, the greater of the applicable waiting periods applies. • Deed-in-Lieu of Foreclosure, Pre-foreclosure Sale (often called a short sale), and Charge-Off of a Mortgage Account require a 4 year waiting period from the completion date of the deed-in-lieu of foreclosure, pre-foreclosure sale, or charge-off as reported on the credit report or other documents provided by the borrower. These events are alternatives to foreclosure. A 2 year waiting period is allowed if extenuating circumstances are documented. • A deed-in-lieu of foreclosure is a transaction in which the deed to the real property is transferred back to the servicer. These are typically identified on the credit report through Remark Codes such as “Forfeit deed-in-lieu of foreclosure.” • A pre-foreclosure sale or short sale is the sale of a property in lieu of a foreclosure resulting in a payoff of less than the total amount owed, which was pre-approved by the servicer. These are typically identified on the credit report through Remark Codes such as “Settled for less than full balance.” • A charge-off of a mortgage account occurs when a creditor has determined that there is little (or no) likelihood that the mortgage debt will be collected. A charge-off is typically reported after an account reaches a certain delinquency status and is identified on the credit report with a manner of payment (MOP) code of “9.” Additional requirements may apply, especially when seek a shorter extenuating circumstances period. Only the purchase of a principal residence is permitted. Only limited cash-out refinances are permitted. You may need a larger down payment. For the purchase of second homes or investment properties and large cash-out refinances you must wait the full 7 years. These rules are subject to change, so one should consult a mortgage broker for the most up to date requirements for buying a home.

Questions You Will be Asked at Your Meeting of Creditors

By Judson Caruson • April 30, 2022
Most people are very worried about their Meeting of Creditors and about what kind of question they will have to answer. Here is the list of required questions and suggested general questions based on a list that has been prepared by the US Trustee's Office. SECTION 341(a) MEETING OF CREDITORS REQUIRED STATEMENTS/QUESTIONS The following statements and questions are required. The trustee shall ensure the debtor answers the substance of each of the questions on the record. The trustee may exercise discretion and judgment in varying the wording of the statements/questions, if the substance of the questions is covered. 1. State your name for the record. Is the address on the petition your current address? 2. Please provide your picture ID and Social Security number card for review. 3. Did you sign the petition, schedules, statements, and related documents and is the signature your own? Did you read the petition, schedules, statements, and related documents before you signed them? 4. Are you personally familiar with the information contained in the petition, schedules, statements and related documents? To the best of your knowledge, is the information contained in the petition, schedules, statements, and related documents true and correct? Are there any errors or omissions to bring to my attention at this time? 5. Are all of your assets identified on the schedules? Have you listed all of your creditors on the schedules? 6. Have you previously filed bankruptcy? 7. What is the address of your current employer? 8. Is the copy of the tax return you provided a true copy of the most recent tax return you filed? 9. Do you have a domestic support obligation? (If so, you must complete a domestic support obligation form that your lawyer will provide. It requires that you list to whom you owe the obligation including the claimant’s address and telephone number.) Are you current on your post-petition domestic support obligations? 10. Have you filed all required tax returns for the past four years? SAMPLE GENERAL QUESTIONS To be asked when deemed appropriate. 1. Do you own or have any interest whatsoever in any real estate? If owned: When did you purchase the property? How much did the property cost? How much do you owe on it? What do you estimate the present value of the property to be? Is that the whole value or your share? How did you arrive at that value? Have you owned any real estate in the last 4 years that is not in your name now? If so, what happened to it. If it was sold, how much did you receive from the sale and what happened to those proceeds. If renting: Have you ever owned the property in which you live and/or is its owner in any way related to you? 2. Did you purchase or refinance a vehicle in the last 6 months? If yes, you will be required to provide a copy of the purchase agreement and registration to the trustee. 3. Does anyone hold property belonging to you? If yes: Who holds the property and what is it? What is its value? 4. Do you have a claim against anyone or any business? If there are large medical debts, are the medical bills from injury? Is there anyone you could sue? Are you the plaintiff in any lawsuit? What is the status of each case and who is representing you? 5. Are you entitled to life insurance proceeds or an inheritance as a result of someone’s death? If yes: Please explain the details. If you become a beneficiary of anyone’s estate within six months of the date your bankruptcy petition was filed, the trustee must be advised within ten days through your counsel of the nature and extent of the property you will receive. 6. Does anyone owe you money? If yes: Is the money collectible? Why haven’t you collected it? Who owes the money and where are they? 7. Have you made any large payments, over $600, to anyone in the past year? 8. Were federal income tax returns filed on a timely basis? When was the last return filed? At the time of the filing of your petition, were you entitled to a tax refund from the federal or state government ? If yes: Inquire as to amounts. If you received your refunds before your case was filed, what did you do with them? Did you give any of them to family or friends? 9. Do you have a bank account, either checking or savings? If yes: What were the balances in each account as of the date you filed your petition? 10. When you filed your petition, did you have: a. any cash on hand? b. any U.S. savings bonds? c. any other stocks or bonds? d. any certificates of deposit? e. a safe deposit box in your name or in anyone else's name? f. any crypto currency? 11. Do you own an automobile? If yes: What is the year, make, and value? Do you owe any money on it? Is it insured? 12. Are you the owner of any cash value life insurance policies? If yes: State the name of the company, face amount of the policy, cash surrender value, if any, and the beneficiaries. 13. Do you have any winning lottery tickets? 14. Were you divorced in the last 4 years. If so, is there anything that it still owing to you are a result of that divorce. If you are married and your spouse is not part of this case, do they have any property in their name not listed on your asset schedules. If you were to be divorced or separated, do you anticipate that you might realize any property, cash or otherwise, as a result of a divorce or separation proceeding? 15. Have you been engaged in any business during the last six years? If yes: Where and when? What happened to the assets of the business? 16. Have you made any transfers of any property or given any property away within the last four year period ? If yes: What did you transfer? To whom was it transferred? What did you receive in exchange? What did you do with the funds?
More Posts