Discharging Student Loans in Bankruptcy: What is Demonstrated Good Faith?
Now that the Biden Administration cannot move forward with plans to cancel student debt based on the outcome of the U.S. Supreme Court case Biden v. Nebraska (2023), debtors throughout Florida are wondering how they are going to be able to make payments on their educational debt. While having student loan debt discharged in a consumer bankruptcy case might have seemed like a remote possibility in the past, the new guidance was established in part to “reduce debtors’ burdens in pursuing an adversary proceeding by simplifying the fact-gathering process” and “to increase the number of cases where the government stipulates to the facts demonstrating a debt would impose an undue hardship and recommends to the court that a debtor’s student loans be discharged.” In short, the new guidance makes it easier for debtors to have student loans discharged when they file for bankruptcy.
Yet as the language quoted above clarifies, debtors still must meet the “undue hardship” requirement that existed previously, along with other elements of the Brunner test. One thing a debtor must show as part of the test is that they have demonstrated good faith, or made a good faith effort, to repay their student loans. Our West Palm Beach bankruptcy lawyers can explain.
Requirements Debtors Must Meet to Have Student Loans Discharged in Bankruptcy
The applicable law remains the same in terms of the requirements a debtor must meet to have student loans discharged in bankruptcy. Part of the requirements include a “good faith” element, as we noted above. In the Brunner test, the third element of the test specifically requires that “the debtor has made good faith efforts in the past to repay the student loan.”
In addition to demonstrating good faith, the debtor also must show that that”cannot presently maintain a minimal standard of living if required to pay the loan,” and that “circumstances exist that indicate the debtor’s financial situation is likely to persist into the future for a significant portion of the loan repayment period.” Together, these three elements make up the Brunner test, or showing that continuing to repay loans would constitute an undue hardship.
How to Prove a Good Faith Effort
How can a debtor prove they have made a good faith effort to repay their student loans? The new guidance cites all of the following as potential evidence of good faith:
- making a payment;
- applying for a deferment or forbearance (other than in-school or grace period deferments);
- 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.
Contact a West Palm Beach Bankruptcy Attorney
With the new guidance from the DOJ, more debtors are likely to have their student loan debt discharged when they file for bankruptcy. Our firm knows that many Florida residents are struggling with student debt, and that bankruptcy is certainly an option in the wake of the recent Supreme Court decision that struck down the Biden Administration’s plan to forgive student debt. While you may not be eligible to have your student loan debt canceled, you may be eligible to have your student loan debt discharged by filing for bankruptcy.
An experienced West Palm Beach bankruptcy attorney at Kelley, Kaplan & Eller can assess your financial circumstances today and can provide you with more information about discharging student loan debt in a Chapter 7 or Chapter 13 bankruptcy case.
Source:
justice.gov/civil/page/file/1552681/download
