88. Student Debt Bankruptcy: New DOJ Guidelines

For decades, borrowers believed a persistent myth: student loans cannot be erased in bankruptcy. While it has historically been incredibly difficult, it was never strictly impossible. In November 2022, the Department of Justice (DOJ) and the Department of Education (ED) released new guidelines that significantly altered this process. These changes aim to make the “undue hardship” standard clearer, fairer, and easier for honest borrowers to meet.

The Historic Barrier: The "Undue Hardship" Standard

To discharge student loans in bankruptcy, you must prove that repaying the debt would cause “undue hardship.” This term appears in the bankruptcy code but was never clearly defined by Congress. Consequently, courts created their own strict tests. The most common is the Brunner Test, used in most federal circuit courts.

Under the Brunner Test, a borrower must prove three things:

  1. Poverty: You cannot maintain a minimal standard of living if you are forced to repay the loans.
  2. Persistence: Your financial situation is likely to continue for a significant portion of the repayment period.
  3. Good Faith: You have made a good faith effort to repay the loans.

Before the new guidelines, government lawyers would aggressively fight borrowers in court on every single point. They often argued that if a borrower bought a cup of coffee or owned a modest car, they failed the test. The new 2022 guidance directs DOJ attorneys to stop using these aggressive tactics and instead use objective data to determine eligibility.

The New Attestation Form

The centerpiece of the new process is a 15-page Attestation Form. If you file for bankruptcy and want to discharge your federal student loans, you fill out this form to provide a snapshot of your finances.

This form allows the Department of Justice to stipulate (agree) to a discharge without a long, expensive trial. If the information in your form shows you meet the criteria, the government effectively says, “We agree this is an undue hardship,” and recommends the judge wipe out the debt.

1. Assessing Your Present Ability to Pay

The first step of the new review process looks at your current budget. Instead of arguing over every grocery bill, the DOJ now uses IRS National Standards and Collection Financial Standards.

These are standardized dollar amounts allowed for housing, food, utilities, and transportation based on where you live and your family size. If your actual expenses are within these IRS limits, the government will not challenge them. If your expenses exceed your income after accounting for these standard costs, the DOJ accepts that you cannot afford to pay.

2. Proving Persistence (The Future)

Historically, proving that your financial trouble would last forever was the hardest part of the Brunner Test. The new guidelines introduce “presumptions” that make this much easier.

The DOJ now presumes your financial hardship is likely to persist if you fall into specific categories. You likely satisfy this requirement if:

  • You are age 65 or older.
  • You have a disability or chronic injury impacting your ability to work.
  • You have been in repayment for at least 10 years.
  • You did not complete the degree for which you took out the loans.

If you fit one of these categories, government attorneys are instructed not to waste time arguing about your future earning potential.

3. Demonstrating Good Faith

The final hurdle is showing you tried to pay. In the past, missing payments could ruin your case. Now, the guidelines take a more holistic view.

The DOJ looks for evidence such as:

  • Making payments when you had the money.
  • Applying for deferments or forbearances legally.
  • Attempting to maximize your income or minimize expenses.
  • Enrolling in an Income-Driven Repayment (IDR) plan.

Crucially, the guidance states that failure to enroll in an IDR plan does not automatically disqualify you. This is a major shift. Previously, lawyers argued that if you could pay $0 on an IDR plan, you didn’t have a hardship. Now, if you have a valid reason for not enrolling, or if the debt would still grow under an IDR plan, you can still prove good faith.

The Legal Process: The Adversary Proceeding

It is vital to understand that discharge is not automatic. You cannot simply check a box on your standard bankruptcy paperwork. You must follow a specific legal procedure:

  1. File Bankruptcy: You file a standard Chapter 7 or Chapter 13 bankruptcy case.
  2. File an Adversary Proceeding: This is a separate lawsuit filed within your bankruptcy case against the Department of Education.
  3. Submit the Attestation: You provide the completed Attestation Form to the Assistant United States Attorney handling your case.
  4. Government Review: The DOJ reviews your form. If they agree you meet the standard based on the new guidelines, they file a stipulation recommending discharge.
  5. Court Order: The bankruptcy judge reviews the recommendation and issues the final order discharging the debt.

Who This Applies To

These guidelines specifically apply to loans held by the Department of Education. This includes Direct Loans and ED-held FFEL loans.

These guidelines do not bind private lenders like SoFi, Discover, or Navient (for private loans). While the legal standard (Brunner Test) is the same for private loans, private lenders are not required to follow the DOJ’s helpful policy. They may still fight you aggressively in court. However, the DOJ guidelines can still be used as a persuasive reference in these cases to show the judge what a “reasonable” interpretation of the law looks like.

Frequently Asked Questions

Does this erase parent PLUS loans? Yes, Parent PLUS loans are federal loans and are eligible for this process. The parent borrower must file for bankruptcy and prove undue hardship regarding their own financial situation.

Do I need a lawyer to do this? While you can file an adversary proceeding “pro se” (without a lawyer), it is highly risky. Bankruptcy law is complex. Many bankruptcy attorneys are now more willing to take these cases because the streamlined DOJ process reduces the hours and cost involved.

What happens if the DOJ denies my request? If the DOJ reviews your Attestation Form and does not agree to a full discharge, they might agree to a partial discharge. If they agree to neither, your case proceeds to trial. You then have to argue your case before a judge, just like in the old system.

Will I owe taxes on the discharged debt? Generally, debt discharged in bankruptcy is not considered taxable income by the IRS. This is different from loan forgiveness programs outside of bankruptcy, which can sometimes trigger a tax bill (though currently, federal loan forgiveness is tax-free through 2025). Always consult a tax professional for your specific year of filing.