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WASHINGTON, DC – MAY 19: Sen. Richard Durbin (D-Ill.) asks questions during a Senate Appropriations … [+] Subcommittee hearing on May 19, 2021 in Washington, DC. (Photo by Greg Nash-Pool/Getty Images)
A new, bipartisan bill that will be introduced into the Senate would allow borrowers to discharge their student loan debt through bankruptcy.
The bill, called the Fresh Start Through Bankruptcy Act, would amend the bankruptcy code to more easily permit student loan discharges under certain conditions. The bill is sponsored by Senator Richard Durbin (D-IL) and Senator John Cornyn (R-TX).
While it is not impossible under current law to discharge student loan debt through bankruptcy, it can be quite difficult. To do so, most borrowers must show that they have an âundue hardship,â which is a challenging legal threshold to meet. The bankruptcy code itself does not adequately define what âundue hardshipâ even means, so courts have created tests (which vary somewhat by jurisdiction), to help judges issue rulings about whether or not a borrower meets the tough standard. In many jurisdictions, borrowers must prove that there is a âcertainty of hopelessnessâ to their circumstances â an often impossible task.
The process of proving undue hardship creates additional hurdles for borrowers, as well. A borrower seeking to discharge their student loan debt through bankruptcy must initiate whatâs called an âadversary proceedingâ â which is essentially a lawsuit against their student loan loan lenders brought within the bankruptcy case â to make their case. Student loan lenders, in most instances, will oppose the borrowerâs arguments. The adversary proceeding can be a long, expensive, and very invasive process. Student loan lenders, including the federal government, often have significantly more resources than borrowers, giving them a tactical edge. As a result, many student loan borrowers are not able to find success, and others donât even try.
The new bankruptcy reform bill would change this by allowing federal student loans to be discharged in bankruptcy, without having to prove undue hardship. The bill would require that borrowers seeking a discharge have been in repayment on their loans for at least the previous 10 years. This so-called âwaiting periodâ would mirror earlier bankruptcy legal standards for student loans, before Congress passed legislation creating the undue hardship standard. It is designed to prevent borrowers from trying to discharge or cancel their student loans in the years immediately following graduation from their degree program.
âThis is new to America. It didnât used to be this way. Before 1976, student loans were treated like other types of unsecured debt in bankruptcy. If you were facing financial ruin, you could get relief,â said Sen. Durbin in his remarks today before the Senate Judiciary Committee. Now, âproving undue hardship is nearly impossible… Undue hardship should not be the only path to address student loans in bankruptcy. There should be another option. We should go back to how it was before 1998, when borrowers could also seek relief after a significant waiting period. That system worked… Thatâs why today, Iâm introducing a bill with Senator Cornyn: the Fresh Start Through Bankruptcy Act⊠would restore the ability of student loan borrowers to discharge federal student loans, after a waiting period of ten years. And it would pair this reform with an accountability measure for schools that have consistently high default rates.â
The fact that the bill has bipartisan sponsorship is significant, and suggests that it could have a real chance of passing Congress and becoming law. âThis is a big moment,â said Durbin today. âIâve been introducing student loan bankruptcy [bills] for a long time. This is the first time itâs been bipartisan. With this bill, we see a growing bipartisan consensus that the status quo isnât working, and that we need student loan bankruptcy reform.â
Legislative text for the bill should be released in the coming days, which will provide more details on the particulars of the reform proposals.
Further Reading
Student Loan Cancellation Debate Continues Amidst Servicer Disruption
Student Loan Mess Looms: Borrowers, Do These 6 Things By September
Huge Student Loan Servicing Shakeup: This Major Loan Servicer Is Ending Its Contract
Did The Biden Administration Just Send A Big Signal On Student Loan Cancellation