The Fresh Start Through Bankruptcy Act would change the bankruptcy code to make it easier to discharge student loans under certain conditions. Senators Richard Durbin (D-IL) and John Cornyn (R-TX) are the bill’s sponsors (R-TX).
While it is not impossible to discharge student loan debt through bankruptcy under existing law, it can be extremely difficult. To do so, most borrowers must demonstrate “undue hardship,” which is a difficult legal standard to fulfill. Because the bankruptcy legislation does not sufficiently define “undue hardship,” courts have devised tests (which vary slightly by jurisdiction) to assist judges in determining whether or not a borrower fulfills the stringent criterion. Borrowers in many countries must demonstrate a “certainty of hopelessness” in their situation, which is sometimes an impossible undertaking.
Borrowers face additional challenges as they attempt to demonstrate excessive hardship. To establish their case for discharge of student loan debt through bankruptcy, a borrower must launch what is known as a “adversary proceeding,” which is essentially a lawsuit against their student loan loan lenders brought within the bankruptcy case. In most cases, student loan lenders will argue against the borrower’s points. The adversary procedure can be a lengthy, costly, and intrusive process. Student loan lenders, including the federal government, frequently have far more resources than borrowers, providing them a strategic advantage. As a result, many student loan debtors do not succeed, and others do not even try.
The new bankruptcy reform plan would change that by allowing federal student loans to be canceled in bankruptcy without the need to demonstrate undue hardship. Borrowers seeking a discharge would be required by the law to have been in repayment on their loans for at least the previous ten years. This so-called “waiting time” would be similar to previous bankruptcy law requirements for student loans, prior to Congress passing legislation establishing the undue hardship criterion. It is intended to deter borrowers from attempting to discharge or cancel their student debts in the years immediately after their degree program graduation.
The fact that the bill has bipartisan support means that it has a good chance of moving through Congress and becoming law. “This is a huge moment,” Durbin stated today. “For a long time, I’ve been introducing student loan bankruptcy [bills]. This is the first time it has been done on a nonpartisan basis. With this bill, we see a growing bipartisan understanding that the status quo is broken and that student loan bankruptcy reform is required.”
The bill’s legislative text, which will provide further details on the specifics of the reform ideas, should be released in the following days. If you’d like to track the status of the bill you can do so here.