The Department of Education has published a request for information in today’s Federal Register seeking comment on the factors used to evaluate claims of undue hardship made by student loan borrowers attempting to discharge student loans through adversary proceedings in bankruptcy court. Responses to the RFI must be received by May 22, 2018.
Under the federal Bankruptcy Code, a student loan can be discharged in bankruptcy only if necessary to avoid an “undue hardship” on the borrower. Congress did not define “undue hardship” in the Bankruptcy Code nor did it authorize the ED to do so by regulation. As a result, the legal standard for a student loan borrower to prove “undue hardship” has been developed through case law, with courts generally using one of two tests to determine if “undue hardship” has been established. The three-factor Brunner test (named after the case in which the test was first articulated) evaluates the debtor’s standard of living, likely duration of his or her financial difficulties, and the efforts he or she made to continue making loan payments before filing for bankruptcy. The “Totality of the Circumstances” test looks at the debtor’s financial resources (past, present, and future), his or her reasonably necessary living expenses, and any other relevant factors and circumstances surrounding the debtor’s individual circumstances.
ED regulations require guarantors and educational institutions participating in the Federal Family Education Loan Program (FFELP) and Federal Perkins Loan Program (Loan Holders) to evaluate undue hardship claims to determine if requiring repayment of a student loan would constitute undue hardship. Guidance issued by the ED in 2015 provides that Loan Holders should use a two-step analysis when evaluating undue hardship claims. First, using the tests established by the federal courts, a Loan Holder should determine whether requiring repayment would impose an undue hardship. Second, if the Loan Holder determines that requiring repayment would not impose an undue hardship, it must evaluate the costs of undue hardship litigation. If the costs to litigate the matter in bankruptcy court are estimated to exceed one-third of the loan balance, the Loan Holder is permitted to accept an undue hardship claim.
The 2015 guidance included a discussion of factors that are appropriate for a Loan Holder to consider when evaluating an undue hardship claim and how such factors fit within the tests established by the federal courts. It also stated that the guidance mirrored the ED’s existing practice for the Direct Loan program and for ED-held FFELP and/or Perkins loans.
The RFI seeks comment on:
- Factors to be used in evaluating undue hardship claims and the weight to be given to such factors
- Whether the use of two tests results in inequities among borrowers
- Circumstances under which a Loan Holder should concede an undue hardship claim
- Whether and how the 2015 guidance should be amended