As the student loan debt crisis in America becomes more alarming, and with the U.S. reaching $1.73 trillion dollars student loan debt, the options to eliminate such debts are grim at best. As recent report published by the Student Debt Crisis Center states that “90% of federal student loan borrowers are not ready to resume payments on October 1, 2021.
Over the years, student loan debt has become exceedingly difficult, but not entirely impossible, to discharge in bankruptcy. Hence, millions of Americans find themselves struggling to pay off student loan debts well into retirement with no end in sight. The crisis is fueled further by the widespread belief that student loan debt cannot be discharged in bankruptcy which, unfortunately, deters people from even making the inquiry. Enter the Fresh Start Through Bankruptcy Act of 2021. In this blog we will discuss why reform is necessary and what congress is doing to find a solution to this worsening crisis.
Why is a Reform Necessary?
Faced with surmounting student loans and an economy reeling from the impacts of the COVID-19 pandemic, student borrowers find themselves with very few, if any, options to regain financial stability. Where bankruptcy is intended to alleviate a debtor and provide a fresh start, it is not necessarily the case for student loan debts.
As bankruptcy law stands today, the option to discharge student loan debt is available to those who can meet the burdensome “undue hardship” standard, which not only requires the debtor to prove extreme circumstance, but necessitates the initiation of an adversary proceeding lawsuit against the student loan lender within the debtor’s bankruptcy case. For the average debtor who is already strapped financially and considering bankruptcy, going up against a private student loan lender and the federal government in a legal proceeding, would deter anyone from attempting to take on the challenge of discharging student loans in a bankruptcy.
Furthermore, the “undue hardship” threshold is not well-defined by statute, nor by precedent, leaving it open to the application of various interpretations and legal tests by bankruptcy courts. Inevitably, this has led bankruptcy courts to conflicting decisions, resulting in confusing outcomes. The daunting nature of “undue hardship” standard under the current bankruptcy laws not only promulgates the misconception that bankruptcy does not allow for the discharge of student loan debt, but also severely deters attorneys and debtors alike from pursuing a student loan debt discharge in bankruptcy. Now with the proposal of the Fresh Start Through Bankruptcy Act of 2021, there is now a glimmer of hope for millions of Americans.
What is the Fresh Start Through Bankruptcy Act of 2021?
The bi-partisan bill, The Fresh Start Through Bankruptcy Act of 2021, sponsored by Senator Durbin and Senator Cornyn, would amend the bankruptcy code to “restore the ability for struggling borrowers to seek a bankruptcy discharge for federal student loans after a waiting period of ten years.” Essentially, it would make federal student loans eligible for discharge in a bankruptcy proceeding provided that the debtor has been in a repayment plan for ten years. The bill would also eliminate the “undue hardship” threshold. However, the existing “undue hardship” standard would remain applicable for private student loans and for federal student loans that have been due for less than ten years. The bill also adds a safeguard, requiring colleges with more than one-third of their student receiving student loans to partially refund the government if a student’s loan gets discharged in bankruptcy. In effect, student borrowers facing the grim reality of surmounting student loan debt with no means for repayment can resort to bankruptcy as an option to rehabilitate their financial condition, and begin with a clean slate as is the intended purpose of bankruptcy.
We Can Help
At Scura, Wigfield, Heyer, Stevens & Cammarota, LLP, we understand the stress, anxiety and confusion that can be associated with your student loans and the potential of having to file for bankruptcy to discharge them. However, know that you’re not alone and we’re here to help. As the Fresh Start Through Bankruptcy Act of 2021 makes its way through Congress, we will keep you up to date with any new developments, and make sure that we provide you with the best service to help you with your student loans. Give our bankruptcy team a call at 973-870-0434 or toll-free at 888-412-5091 to see how we can help.
