Student Debt Discharge In Bankruptcy: Movement Toward A Kinder And Gentler Approach

• Published date: 23 November 2022
• Subject Matter: Consumer Protection, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Education
• Law Firm: Cullen and Dykman
• Author: Kevin McDonough, Michael Traison, Dina Vespia and Michael Kwiatkowski

On November 17, 2022, the U.S. Department of Justice (DOJ), in coordination with the U.S. Department of Education (DOE), announced the adoption of a new policy and process for handling debtors in bankruptcy seeking to discharge federal student loan debt. See Justice Department and Department of Education Announce a Fairer and More Accessible Bankruptcy Discharge Process for Student Loan Borrowers | OPA | Department of Justice.

The announcement emphasizes a joint commitment by DOJ and DOE to creating "clearer, fairer, and more practical standards" for assessing discharge requests by student loan borrowers in bankruptcy. We discussed how the bankruptcy process works with respect to discharge of student debt in several of our prior alerts. See An Update on Student Loan Debt: Interpretation of the Statute is Critical; Another Bankruptcy Court Rules in Favor of Discharging Student Loan Debt; Student Loan Debt Discharged in Recent Bankruptcy Court Opinion; Student Loan Debt Discharged in Recent Illinois Bankruptcy Court Opinion; Student Loan Mediation Before Litigation Program Adopted by the United States Bankruptcy Court for the Southern District of New York.

The issuance of the new advisory on the process of responding to debtors seeking discharge of student loan debt comes amidst the Administration's attempts to use Executive Orders to forgive student loan debt which have encountered resistance from several federal courts confronting the issue. The new policy appears to recognize the inconsistency in handling the discharge issue among the courts as well as the harshness of the application of the "undue hardship" standard as it has developed under the current caselaw, including under its most common test based on Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987).

The process of seeking discharge of student loan debt requires commencement of an adversary proceeding which is litigation which can become time intensive, emotionally stressful and economically disastrous. This new policy seeks to avoid unnecessary litigiousness and provides a process for DOJ attorneys to handle, at the outset, adversary proceedings where the debtor seeks to discharge federal student loan debt. The new policy is directed not at the Office of the United States Trustee (who rarely, if...