Bankruptcy & Student Loans: How It Works & How to File

An individual who files for bankruptcy under Chapter 7, Chapter 11 or Chapter 13 can request that the court discharge their federal student loans. In November 2022, the U.S. Department of Justice (DOJ) announced a new process to handle cases involving a request for a discharge.

The guidance for DOJ attorneys advises them to recommend to the court that a debtor’s student loan be discharged based on three factors: if the debtor presently lacks an ability to repay the loan; the debtor’s inability to pay the loan is likely to persist in the future; and the debtor has acted in good faith in the past in attempting to repay the loan.

An American debtor that requests a discharge of federal student loans in bankruptcy will be asked to provide relevant information to the government. They must complete an attestation form that asks for information about their income and expenses.

The attestation asks a debtor to provide documents that evidence the debtor’s stated income. These may be tax returns, or where appropriate, pay stubs or other documents that prove income.

The DOJ attorney may seek additional evidence when necessary to support representations in the attestation. The Department of Education provides the debtor’s account history and loan details to the DOJ. The debtor will receive that information when they get the attestation form.

The debtor is required to sign the attestation under penalty of perjury (the offense of telling a falsehood to the court after taking an oath).

The information required in the attestation form allows the DOJ attorney to evaluate the debtor’s current ability to pay. The attestation also contains information that helps the DOJ attorney evaluate whether the debtor’s inability to repay the loan will persist in the future and whether the debtor has previously acted in good faith to repay the loan.

Ideally, the DOJ attorney will ask for the attestation from the debtor when the case begins. This allows early consideration as to whether the DOJ will agree to facts relevant to undue hardship. The DOJ attorney is not required to impose a strict time limit for the attestation.

The DOJ attorney should provide the debtor with the opportunity to submit the attestation after the debtor starts an adversary proceeding pursuant to 11 U.S.C. Section 523(a)(8) seeking discharge of the student loan. An adversary proceeding is a separate lawsuit within the bankruptcy case.

The DOJ attorney should contact the debtor or the debtor’s attorney as soon as practicable after the service of process in the adversary proceeding.

A full discharge is the right fit for debtors with expenses equal to, or greater than, their income, when they meet the other elements of DOJ’s analysis. Partial discharge forgives a portion of the outstanding student loan debt, but requires payment of the remainder. DOJ attorneys may recognize the availability of partial discharge when the option is appropriate and permissible.

DOJ attorneys can recommend partial discharge if the debtor can make some payments on the loan while maintaining a minimal standard of living, yet is unable to make the full standard monthly repayment due.

A partial discharge should not result in a remaining, or undischarged, balance that is larger than the debtor’s discretionary income allows them to pay off in monthly payments over the remaining loan term. Partial discharge may also be available to a debtor who can liquidate assets to pay a portion of the debt, but is unable to pay the rest while maintaining a minimal standard of living.

After the bankruptcy court issues the discharge order, it provides this order to the debtor. If the debtor loses or misplaces the document, they can get another by contacting the clerk of the bankruptcy court that entered the order.

The clerk will charge a fee for searching the court records, and there are additional fees for making and certifying copies. If the case has been closed and archived, there is also a retrieval fee, and obtaining the copy will take longer. The amount of such fees varies according to the local bankruptcy court.

A debtor may obtain the discharge order electronically through the U.S. Court PACER system. PACER gives the public electronic access to selected case information through a personal computer located in many clerks’ offices.

The debtor can also access PACER directly by setting up an account to get access. They will have to pay a per-page fee to download and copy documents filed electronically.

The bankruptcy court has the ability to revoke a discharge under certain circumstances. For example, a trustee, a creditor, or the U.S. bankruptcy trustee can request that the court revoke the debtor’s discharge in a Chapter 7 bankruptcy case if there are allegations that the debtor:

• ‌Fraud.‌ Obtained the discharge fraudulently.
• ‌Property.‌ Did not disclose the fact that they acquired, or became entitled to acquire, property that would be considered part of the bankruptcy estate.
  
• ‌Impropriety.‌ Committed one of several acts of impropriety in U.S. Code Title 11 Section 727(a)(6), such as refusing to obey a lawful order of the court other than an order to respond to a material question or to testify.
• ‌Audit.‌ Failed to explain any misstatements discovered in an audit of their case or provide documents or information requested in an audit.

In Chapters 11 and 13 bankruptcy cases, if the debtor obtains confirmation of a repayment plan or of the discharge itself through fraud, the court can revoke the order of confirmation or the discharge. A trustee is a person who takes administrative responsibility for the financial affairs of the debtor and distributes assets to creditors.

The U.S. trustee is a DOJ officer responsible for supervising the bankruptcy case, the bankruptcy estate and case trustees. The U.S. trustee monitors plans and disclosure statements, Chapter 11 creditors’ committees and fee applications.

Typically, a creditor or other party must file a request to revoke a debtor’s discharge within one year of the discharge. In some cases, the request must be filed before the case is closed. The court will determine whether allegations against the debtor are true.

A bankruptcy court’s discharge of federal student loans is different from the federal administration’s action to forgive federal student loans. The court’s discharge of federal student loans is an action by the court to release the debtor from personal liability. It is a permanent order that disallows creditors from collecting on discharged debts.

The debtor must file a petition for bankruptcy and have an active bankruptcy case in order for the court to order a discharge.

Student loan forgiveness is the federal government’s action to allow the borrower not to repay their loans.

As of December 2022, court-issued orders block the Biden-Harris Administration’s student debt relief plan.

This plan involves a one-time student loan debt relief of up to $20,000 for a student loan borrower who received a federal Pell Grant and up to $10,000 in debt relief for a borrower who did not receive a federal Pell Grant.

In order to be eligible for loan forgiveness, a borrower must have loans held by the U.S. Department of Education (ED) and have an individual income of less than $125,000 ($250,000 for households).

The federal government has additional student loan forgiveness programs, including public service loan forgiveness, income-driven repayment forgiveness, teacher loan forgiveness, military service, AmeriCorps and other options.

The timing of the discharge in bankruptcy varies depending on the chapter under which the case is filed. In a Chapter 7 case, the court typically grants the discharge when the time for filing a complaint objecting to a discharge and the time fixed for filing a motion to dismiss the case for substantial abuse expire.

This is 60 days following the first date set for the "341 meeting" of the creditors. Usually, this meeting occurs about four months after the date the debtor files the petition with the clerk of bankruptcy court.

In individual Chapter 11 cases and in Chapter 13 bankruptcy cases, the court usually grants a discharge as soon as practicable after the debtor completes all payments under the plan.

As a Chapter 13 plan provides for payments to be made over three to five years, the discharge often occurs about four years after the date of filing. The court may deny an individual debtor’s discharge in a Chapter 7 or Chapter 13 case if the debtor does not complete an instructional course on financial management.

The U.S. Bankruptcy Code states that there are limited exceptions to meeting this requirement if the U.S. trustee or bankruptcy administrator determines that there are inadequate educational programs available, or if the debtor has a disability, is incapacitated or is on active military duty in a combat zone.

Unless there is litigation involving objections to the discharge, the debtor will typically automatically get a discharge of other eligible debts. The clerk of the bankruptcy court must mail a copy of the order of discharge to all creditors; the U.S. trustee; the trustee in the case; and the trustee’s attorney, if they are represented by legal counsel.

The debtor and the debtor’s attorney also receive copies of the discharge order. The order is not specific as to the debts that the court determined to be non-dischargeable, or not covered by the discharge.

The federal government should not attempt to collect federal student loans that a bankruptcy court has discharged. If a creditor for another type of debt, such as a private student loan, attempts to collect on a discharged debt, the debtor can file a motion with the court to report the action. The debtor should ask that the case be reopened to address the matter.

The court can sanction a creditor for violating the bankruptcy court's discharge injunction. Under these circumstances, the injunction disallows creditors from taking any action to collect on a discharged debt.

The typical sanction for violating the discharge injunction is civil contempt, which is usually punishable by a fine to be determined by the court.

Prior to November 2022, federal student loans were typically not discharged in the average bankruptcy case. The DOJ’s new process changed the rules as to the discharge of federal student loans, but the new process did not alter rules for the discharge of private student loans.

One benefit of a discharge of student loans in a bankruptcy case is to stay, or pause, loan collection efforts while the bankruptcy case is pending. Another benefit is the discharge of the loans.

A bankruptcy court follows the DOJ’s specific guidance regarding federal student loans. This guidance does not apply to other types of loans. The court determines whether to discharge other loans based on the facts in the debtor’s petition, and arguments and facts presented by creditors.

A debtor can request that the court discharge private student loans. Private student loans are considered similarly to other types of loans in bankruptcy cases. Rulings on this matter vary according to the federal circuit in which the bankruptcy case was filed.