Bipartisan Bill Proposes to Make Student Loans Dischargeable in Bankruptcy
Student loans are the second largest category of consumer debt in America, after home mortgages. According to the Federal Reserve, over 45 million Americans owed more than 1.7 trillion in student loans. Approximately 15% of all outstanding student loans are in default at any given time. Yet, student loans, unlike most other debts, are not dischargeable in bankruptcy unless the borrower can prove that they will suffer an “undue hardship” if they are not permitted to discharge their debts. Bankruptcy Courts have historically held the bar for proving “undue hardship” very high, leading many people not to even try to discharge their student loans in bankruptcy. More than 32% of consumers filing for Chapter 7 bankruptcy carry some amount of student loan debt. However only a small fraction of those will successfully discharge their student loans. So, while the rest of their debts can be left behind in bankruptcy, under current law their student loan debts will continue to follow them indefinitely.
It seems however, that relief from student loan debt may finally be near. Last month, Senators Richard Durbin of Illinois and John Cornyn of Texas introduced the FRESH START Through Bankruptcy Act of 2021. The FRESH START Act would allow borrowers to discharge their student loan debts in bankruptcy after 10 years of the loans entering repayment. For student loans less than 10 years from the repayment date, the same undue hardship standard would apply to discharge student loans. In addition to allowing loans to be discharged in bankruptcy, the FRESH START ACT would also require colleges and universities to have “skin in the game” by including a claw-back provision that would put schools on the hook to repay a portion of the discharged loans, if a significant proportion of their students declare bankruptcy for their student loan debts.
Bankruptcy reform for student loan debts is long overdue. While the 10-year waiting period is likely to leave many people struggling with student loan debts they cannot afford for years before relief is available, it is certainly an improvement on the current law which make it nearly impossible to discharge student loan debt. While passage of the FRESH START Act is far from assured, it appears to have bipartisan support in Congress and has a realistic shot at becoming law. The FRESH START Act would be a lifeline for millions of people who have no realistic way of paying off their student loans and other debts.
If you are struggling to pay debts of any kind, contact the Lipton Law Group at 508-202-0681 for a free consultation. A fresh start may be just a phone call away.