Student Loan Adversaries in Bankruptcy

I. Introduction

• Adversary proceeding under §523(a)(8) is required.
• DOJ/DOE 2022 framework makes outcomes more predictable.
• Goals for today’s presentation:
  1. Soft review of the new student loan adversary process from 2022.
  How AUSA is similar to the VAWA unit.
  Success rates we are seeing.
  Type of discharges.
  2. Introduce the Best Case Tools.
  3. Talk about doing it without Best Case and a rough guideline on how to process your own adversary from initial consult to settlement.
  4. Introduce helpful  government (US Attorney Guidance memo)  and law firm websites (helpful Q/A sections) and useful form links (Attestation Form, etc)
  5. Possible helpful new information on issues like how much to charge for a student loan adversary, more info on the attestation form, new info attorneys are seeing on the front line.

NOTES:
Prior to 2022, it was virtually impossible to obtain a student loan discharge in the 4th Circuit. However, In November 2022, the Department of Justice (DOJ), in collaboration with the Department of Education, introduced revised guidelines aimed at simplifying and standardizing the process for evaluating “undue hardship” claims in federal student loan bankruptcy cases. 

• Standardized Process: The new guidance provides clearer expectations for discharging student loan debt in bankruptcy and streamlines the process for borrowers, particularly when dealing with federal (specifically Direct Loans and Direct Consolidation Loans) student loans held by the Department of Education.
• “Undue Hardship” Requirements: While the underlying law for student loan discharge (proving “undue hardship”) hasn’t changed, the guidance aims to make the process of demonstrating it more accessible. Borrowers still need to show they:
  • Cannot maintain a minimal standard of living while repaying the loan.
  • Have a financial situation unlikely to improve significantly over the loan’s repayment period.
  • Made a good faith effort to repay the loan in the past.
• Attestation Form: A key aspect of the new process is a 15-page attestation form that helps debtors provide the necessary information to support their undue hardship claim. This form simplifies the process compared to previous methods.
• DOJ Recommendation: After reviewing the attestation form and other relevant information, a DOJ attorney (an Assistant United States Attorney) makes a recommendation to the bankruptcy judge regarding whether a full or partial discharge of the student loan debt is appropriate. While the recommendation isn’t binding, it carries significant weight with the court.
• Increased Success Rates: Data suggests the new guidance has been successful in making it easier for eligible borrowers to receive a discharge. Since its implementation, 98% of cases decided by the courts (from November 2022 to March 2024) have resulted in full or partial discharges based on government recommendations. Not sure I trust this figure, but the point is that a very high percentage of cases are approved for some sort of relief where the AUSA gives there blessing. 
• Applies to federal loans only: This new process specifically addresses federal student loans held by the Department of Education (Direct Loans and Direct Consolidation Loans). Private student loans are not subject to the same streamlined process.
• Still Requires Adversary Proceeding: To discharge federal student loans, borrowers still need to file a separate lawsuit, known as an “adversary proceeding,” within their bankruptcy case, seeking the court to find that repaying the loan would impose an undue hardship. Filing fee is free. Procedurally enter the word “CORE” on CM/ECF when asked for the amount.
• Bankruptcy Judge still has to approve any settlement

II. Case Law Background

1. Brunner Test (2d Cir. 1987) – Three prongs: minimal standard of living, persistence of hardship, good faith.
   • Adopted by 4th Cir. in Frushour, 433 F.3d 393 (2005).
2. Mosko (4th Cir. 2008) – Applied Brunner strictly, no discharge.
3. Totality of Circumstances Test – Used in some other circuits, less rigid.

III. Best Case Workflow

Best Case has added a Student Loan Adversary service package that simplifies the process for attorneys. The following was provided by Igor Roitburg:

• $300 Full Service Package
  • Best Case contacts the client directly.
  • Completes the DOJ Attestation Form after speaking with the client. Paralegal will contact your client with your approval and complete the form after going through a thorough interview with the client.
  • Requests loan records directly from NSLDS. Will guide the Debtor through the process of opening an account and requesting required documentation. Here is a “How to Website” for student loan data.
  • Provides a final recommendation on dischargeability.
  • Delivers a draft adversary complaint. Attorney will still need to make necessary changes to the draft.
• $99 “Do It Yourself” Guide
  • Best Case provides a written step-by-step outline.
  • Helps attorney complete the Attestation Form manually.
  • Guidance on requesting NSLDS records.
  • Attorney drafts the adversary on their own using Best Case’s framework.
• Free Analysis Option
  • Within a few minutes you are told whether you should pursue a discharge for your client.

NOTES: Email contact to start : sdssupport@stretto.com or email Igor Roitburg at Igor.Roitburg@stretto.com. Please note I am not recommending any of the Best Case Options. I also have concerns about a third party performing work on the case. Option two  and three appears to be the benefit I would choose.

I have a best case brochure I can email that contains more detail

IV. Manual Route (Without Best Case)

Steps if you go solo:

1. Draft §523(a)(8) complaint.
2. Complete Attestation Form manually (income, expenses, assets, history). Remember, this is how the AUST makes their decision. Help them help your client by being as complete as you can. Think outside of the box for factors to help your client.
3. Gather evidence of good faith. Payment history, IDP history or lack of. Proof Debtor has tried to obtain employment, etc.
4. Request DOE/NSLDS records early. I cannot stress this enough!
5. Submit Attestation to AUSA for stipulation attempt. Recommend doing this after the Adversary has been filed and after the AUST has opened their file. 
6. Drafting of the Complaint. Remember, Jurisdiction terms and a section for your CORE Proceeding. An Adversary needs a Core Proceeding to proceed. Add in as much relevant student loan factual information as possible to include good faith acts. Any information in the Complaint make sure you transfer to the Attestation form.

NOTES:
I Personally like the Best case $99.00 version or the manual route. Please note if you have a potential case, there are SC bankruptcy attorneys you can reach out to to help guide you. 

V. Gathering Loan & Payment History

• NSLDS Records – request through studentaid.gov (client login/authorization).
• Servicer Payment Ledgers – Aidvantage, MOHELA, Nelnet, etc.
• Court Discovery – if DOE slow to produce.
• Client Docs – old statements, tax returns (loan interest deduction).

NOTES:

Obtain early and as quickly as possible! Information is needed for AUST and the Attestation form

VI. Practical SC Considerations

• When to file in Chapter 13: Trustees appear to want a Debtor to wait until the end of the case. In a Chapter 7 you will want to start early.
• Assets considered, but exemptions & illiquidity matter. For example, say the Debtor’s exemption on the residence does not cover all the equity, AUST will take into consideration that the house is the residence and the difficulty in liquidating the family home.
• Settlements common: partial discharges, structured resolutions.
• Remember, there is no filing fee for a Debtor adversary proceeding!
• Possible creative plans for attorney fees
• AUSA is trying to find solutions when possible during the litigation.
• Do not be scared to ask for help. We are a small community and we help each other.
• What parties to serve

NOTES: A structured resolution might include a lower interest rate for an example.

VII. Preliminary Client Questions

• How much is owed?
• Degree completed? School closed?
• Employment history & health?
• Past payments, deferments, forbearances?
• Household income, expenses, assets?
• Parent Plus Loans? Unemployment for an extended period, disability, Age : 50+
• Any current chronic medical issue under doctors care that hinders employment.

NOTES: Be as thorough as you can. Remember if you omit information from the Attestation form, the AUST is probably not seeing the information.

VIII. Q&A Prep

• Fees ($2k–$6k common). Possible creative solutions for attorney fees?
• Time (20–40 hours).
• Results (total, partial, settlements).
• DOE timing (several weeks).
• Assets (considered, but exemptions matter and ability to liquidate matter
• Does it apply to private loans?    No

IX. Closing Takeaways

• Case law still applies, but DOJ framework makes relief realistic.
• Attestation Form = roadmap.
• Best Case saves time, but manual works fine if thorough. I recommend for first adversary.
• Gather DOE/servicer records early.
• Note worthy websites and blogs :  1. US Attorney Guide  
• 2. Law Firm Website Guide 
• 3. National Consumer Law Center
• 4. Sample Scenarios (Appendix B)
• 5. Student loan discharge video 

The following four paragraphs come from the US Attorney Student Loan Guide section. (1) Assessment of Present Circumstances, the AUST (Assistant US Attorney) is going to use IRS “standards” to determine “allowable expenses”.  Where the Debtor’s expenses are below the allowable expenses, the Debtor is allowed the full National standard. If the Debtor exceeds, the Debtor is given an opportunity to give a reasonable explanation. Other expense categories in the memo: Allowance of Other Necessary  Expenses and Allowance for Reasonable Expenses Not Incurred. the memo provides good directives on allowable expenses.

Assessment of Future Circumstances. A presumption that a debtor’s inability to repay debt will persist is to be applied in certain circumstances, including: (1) the debtor is age 65 or older; (2) the debtor has a disability or chronic injury impacting their income potential; (3) the debtor has been unemployed for at least five of the last ten years; (4) the debtor has failed to obtain the degree for which the loan was procured; and (5) the loan has been in payment status other than ‘in-school’ for at least ten years. The Attestation is designed to identify any such circumstances, and it advises the debtor to disclose all of the circumstances applicable to their situation and not rely exclusively on a single presumptive basis for claiming a continuing inability to repay. Note, it appears that the AUST is now giving weight to Debtors over 50 and for Debtors who have been unemployed for a significant amount of time but do not meet factor number three above.

Assessment of Good Faith. Evidence of good faith:  The following steps evidence 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.

Enrollment in IDRP or Failure to Enroll:  Where a debtor did not enroll in an IDRP, the Department attorney is expected to look first to the debtor’s Attestation response and to accept any reasonable explanation or evidence supporting the debtor’s non-enrollment in an IDRP. Acceptable explanations or evidence could include, for example: • that the debtor was denied access to, or diverted or discouraged from using, an IDRP, and instead relied on an option like forbearance or deferment; • that the debtor was provided inaccurate, incomprehensible, or incomplete information about the merits of an IDRP; • that the debtor had a plausible belief that an IDRP would not have meaningfully improved their financial situation; • that the debtor was unaware, after reasonable engagement, of the option of an IDRP and its benefits; or • where permitted under controlling case law, that the debtor was concerned with the potential tax consequences of loan forgiveness at the conclusion of an IDRP.