Will Bankruptcy Clear Student Loans? The 2022 DOJ Guidance

The Historic Undue Hardship Standard (11 U.S.C. § 523(a)(8))

For decades, a pervasive myth suggested that student loans are completely impossible to discharge in bankruptcy. In reality, under Section 523(a)(8) of the United States Bankruptcy Code, education loans can be discharged if the debtor proves in an Adversary Proceeding (AP) that repaying the debt would impose an "undue hardship" on the debtor and their dependents.

Historically, bankruptcy courts evaluated undue hardship through the strict three-prong Brunner Test (established by the 2nd Circuit Court of Appeals in Brunner v. New York State Higher Education Services Corp.):

1. The debtor cannot maintain a minimal standard of living if forced to repay the loans based on current income and expenses.
2. Additional circumstances exist indicating that this state of financial distress is likely to persist for a significant portion of the repayment period.
3. The debtor has made good-faith efforts to repay the loans (such as enrolling in income-driven repayment plans).

The Game-Changing November 2022 DOJ & Education Guidance

In November 2022, the Department of Justice (DOJ), in collaboration with the Department of Education, issued historic revised guidance governing how federal attorneys evaluate adversary proceedings. Rather than aggressively litigating against impoverished debtors, DOJ attorneys now utilize a standardized Attestation Form:

• Present Inability to Pay: Uses standard IRS National Standards for living expenses rather than subjecting the borrower to harsh financial scrutiny.
• Future Persistence of Hardship: Rebuttable presumption of ongoing distress if the debtor is over age 65, has a permanent disability, has been unemployed for 5 of the last 10 years, or has loans in repayment for over 10 years.
• Good Faith Demonstration: Borrowers who contacted their servicer (AES, Nelnet, etc.), requested deferment, or enrolled in IDR satisfy this standard.

Early data shows that over 90% of debtors who submitted the new DOJ attestation received a full or partial bankruptcy discharge recommendation from federal attorneys.