The Department of Education just released a guidance document to the Department of Justice on what they feel should be done to allow people to discharge federal student loans, partially or entirely.
While I applaud the efforts by the Department of Education, it seems like we’ve watched this movie before.
This guidance is just that, an opinion letter, not law. If a Republican administration gets back into office, don’t be surprised to see this guidance revised or eliminated altogether.
By the time this guidance, if taken seriously, filters through the courts, I forecast things will change again. I have zero confidence this document can be relied upon in the future.
The better approach would be to have Congress change the Bankruptcy Code and eliminate the hurdles. My reading of the “Guidance for Department Attorneys Regarding Student Loans in Bankruptcy Litigation” is that it attempts to massage the law, not fix it.
The guidance says, “A debtor’s student loan be discharged if three conditions are satisfied: (1) the debtor presently lacks an ability to repay the loan; (2) the debtor’s inability to pay the loan is likely to persist in the future; and (3) the debtor has acted in good faith in the past in attempting to repay the loan.”
But here is where it gets fast and loose. “Department attorneys should stipulate to facts necessary to demonstrate undue hardship and recommend discharge where the debtor provides information in the Attestation (or otherwise during the adversary proceeding) that satisfies the elements of the analysis below. Some debtors have been deterred from seeking discharge of student loans in bankruptcy due to the historically low probability of success and due to the mistaken belief that student loans are ineligible for discharge. Other student loan borrowers have been dissuaded from seeking relief due to the cost and intrusiveness entailed in pursuing an adversary proceeding.”
So it appears the intention is to make it easier to get a discharge by relaxing the current requirements.
For example, to help make one of the hurdles easier, the guidance says, “A presumption that a debtor’s inability to repay debt will persist is to be applied in certain circumstances, including: (1) the debtor is age 65 or older; (2) the debtor has a disability or chronic injury impacting their income potential; (3) the debtor has been unemployed for at least five of the last ten years; (4) the debtor has failed to obtain the degree for which the loan was procured; and (5) the loan has been in payment status other than ‘in-school’ for at least ten years.”
If we follow the guidance, anyone over 65 or someone who failed to obtain the degree for which the loan was procured should check off the future circumstances box.
But that’s not even the real loosey-goosey bit.
The section of what is an appropriate good faith attempt to repay student loans for consideration for a bankruptcy discharge includes the following factors.
“Where the debtor has taken at least one of the following steps and in the absence of countervailing circumstances as discussed below, the steps demonstrate good faith. We would normally expect the Department attorney to be able to determine the presence of any countervailing circumstances based on the information contained in the Attestation and provided by Education or that is publicly available.
Evidence of good faith: The following steps are evidence of good faith:
· making a payment;
· applying for a deferment or forbearance (other than in-school or grace period
· applying for an IDRP plan;
· applying for a federal consolidation loan;
· responding to outreach from a servicer or collector;
· engaging meaningfully with Education or their loan servicer, regarding payment options, forbearance and deferment options, or loan consolidation; or
· engaging meaningfully with a third party they believed would assist them in managing their student loan debt.
Unless I’m reading this wrong, all someone now has to do to make the good faith part of the discharge test is make a payment, apply for a forbearance, apply for an Income-Driven Repayment Plan, consolidate their loans, or respond to a collector.
But here is my favorite, “engaging meaningfully with a third party they believed would assist them in managing their student loan debt.”
If we believe what that says than any discussion with anyone, from a credit counselor, my debt coach friend Damon Day, or just about anyone breathing, would meet that standard. Even a bankruptcy attorney could possibly check that box.
How about this nugget buried in the guidance, “Issues concerning employment, income, and expenses are case-specific and may be highly dependent on a debtor’s family, community, and individual circumstances. Debtors may provide an explanation of those circumstances, and the Department attorney should weigh the explanation in consultation with Education.”
So as long as it passes the sniff test, anything goes.
Bankruptcy attorneys should prepare to get busier than a one-arm wallpaper hanger.
While this solution may be bullshit, it’s the best bullshit we’ve got at the moment to deal with a fair legal discharge and fresh start for people buried in federal student loans.
And for anyone saying the debtors have to suck it up, let me remind you that the government gave out all this money with no qualifications other than a pulse.
This essay was originally posted on November 18th on Get Out of Debt Guy.
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.