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The Department of Justice recently announced a new process for handling cases in which individuals seek to discharge their federal student loans in bankruptcy. The DOJ's stated goal is “to ensure consistent treatment of the discharge of federal student loans, reduce the burden on borrowers of pursuing such proceedings and make it easier to identify cases where discharge is appropriate.”

In their press release the difficulty of overcoming the “undue hardship” standard for student loan discharge and the role of the bankruptcy judge in making the final decision in conceded, but under the new process the DOJ's lawyers would be better able to “recommend discharge to the judge without unnecessarily burdensome and time-consuming investigations. The new process will also help borrowers who did not think they could get relief through bankruptcy more easily identify whether they meet the criteria to seek a discharge.”

The undue hardship test considers “the borrower’s past, present and future financial circumstances.” Under the new process the DOJ will review information provided by the Debtor and the Department of Education and “apply the factors that courts consider relevant to the undue-hardship inquiry and determine whether to recommend that the bankruptcy judge discharge the borrower’s student loan debt.”

The process to get a federal student loan discharged in a bankruptcy starts with the filing of a lawsuit by the Debtor in the bankruptcy court against the Department of Education. A government attorney is assigned to the case and in the past often seemed to take a default position of opposing the discharge.

My reading between the lines is that the DOJ seems to be indicating that they will be making an effort to make it easier to get some student loans discharged. Instead of seeming to take a default position of almost always opposing federal student loan discharges, they will be more likely to recommend discharge than they have in the past. However, bankruptcy judges could continue to use a strict interpretation of the "undue hardship" standard and rule against discharge as readily as they have in the past.

  • Carl Rolsma

A quick look at case numbers assigned in the U.S. Bankruptcy Court for the Western District of Wisconsin shows that bankruptcy case filings appear to be very similar to the number filed a year ago. Bankruptcy Case No. 22-10109 was filed on January 28, 2022. Bankruptcy Case No. 23-10109 was filed on January 27, 2023. The first two digits in a case number indicate the year that the case was filed. The last 4 digits indicate the number of cases filed in the district up to that point in time. Conventional wisdom that I often heard since the covid pandemic started was that bankruptcy filings would go up. However, that did not happen. A likely reason it didn't happen was that usual collection activities slowed down due to moratoriums such as on evictions and foreclosures, and there continues to be a moratorium on student loan payments.

The Wall Street Journal is reporting that Serta Simmons Bedding LLC filed for chapter 11 bankruptcy on Monday in the U.S. Bankruptcy Court in Houston, Texas. The bedding manufacturer is seeking to implement a reorganization plan to cut its nearly $1.9 billion in debt to $300 million.

Good news for Serta Simmons' employees comes from Reuters who is reporting that they "have lined up $125 million in financing to keep operating, including to pay its 3,600 employees."

Not sure how this will affect plans to open " a massive new, state-of-the-art facility in Janesville, which is expected to bring scores of new jobs to Rock Co. soon after it opens, with the potential of more to come after that" that was reported on 4/12/2022 by nbc15. Channel3000 reported that the new facility "slated to open in 2023, will initially employ over 300 people."

In a Chapter 11 bankruptcy, a business may continue to operate while creditors and the court must approve a plan to repay the business's debts. Chapter 11 bankruptcy is rarely used by individuals. The vast majority of consumer bankruptcies are either a Chapter 7, usually the quickest kind of bankruptcy, or Chapter 13 that puts the debtor(s) in a 3 to 5 year payment plan.

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