In the past, the challenge of proving “undue hardship” and the high cost of conducting an adversary process discouraged insolvent debtors from attempting to discharge their college loans. The Harris Firm, LLC can help you understand this better.
The Guidelines encourage the DOJ lawyers to agree to the evidence showing that paying out the debt will cause excessive hardship and to ask the court to discharge the student loan if three requirements are met.
They are as follows:
- The debtor currently is unable to pay back the loan;
- this difficulty is anticipated to continue in the future; and
- the debtor has made previous repayment attempts in good faith.
In accordance with the Guidance, debtors are able to meet these 3 requirements without submitting an adversary proceeding. The DOJ will now employ an affidavit in the form of a certification from the debtor to ascertain if the requirements have been completed.
The DOJ will specify that the student loan is scheduled to be discharged if the debtor complies with the three requirements.
First requirement: Capacity to pay back the loan
The IRS Standards recognize additional potential expenses that may be required for a person’s health and welfare but only specify those items for which they offer a recommended maximum allocation. The debtor may be qualified for a student loan discharge if their authorized expenses outweigh their income. The debtor may be qualified for a partial discharge of the student loan debt if the amount of income available to pay down the debt is insufficient to cover the mandatory monthly payment.
Second prerequisite: Prediction of future events
The second requirement, which the debtor must meet, is that the debtor’s present inability to pay the obligation will probably continue for a sizable amount of the repayment time.
Third prerequisite: evaluation of sincerity
The debtor must meet the third need and must show good faith when it comes to fulfilling his or her commitment to repay student loans. The following actions are listed in the Guidance as proof of good faith:
- Making a payment; requesting a deferment or forbearance (other than one for a period of time spent in school or during a grace period); requesting an income-driven repayment plan (IDRP);
- submitting a federal consolidating loan application;
- responding to a servicer’s or collector’s approach;
- engaging meaningfully with a third party they thought would help them manage their student loan debt; engaging meaningfully with them regarding payment alternatives, forbearance and deferment options, or loan consolidation.