Proposed Legal Changes To Student Loan Discharge In Bankruptcy
Before 1976, student loans could be discharged in bankruptcy without a waiting period and without requiring the borrower to demonstrate undue hardship prior.
But a 5-year waiting period was added by the Education Amendments of 1976 for borrowers who could not demonstrate undue hardship. The waiting period was increased from 5 years to 7 years in 1990 through the Crime Control Act of 1990 and eliminated in 1998 through the Higher Education Amendments of 1998.This left demonstrating undue hardship as the only option for discharging student loans in bankruptcy. But Senators Richard Durbin and John Cornyn introduced the FRESH START Through Bankruptcy Act of 2021 on August 4, 2021.
TheFRESH START ACTwouldrestore the ability of borrowers to discharge federal student loans after a 10-year waiting period without demonstrating undue hardship. And under certain circumstances, the college attended by the student when the loans were borrowed would be required to repay as much as half of the discharged debt.
When Is Student Loan Discharge In Bankruptcy Legally Allowed
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The U.S. Department of Education has the legal authority to allow a borrowers federal student loans to be discharged in bankruptcy, in certain circumstances. It has not, however, generally exercised this authority.
Complaints That Discharge Orders Are Being Violated
Consumer complaints raise serious questions about whether student loan companies are violating discharge ordersmeaning theyre unlawfully collecting on loans even after a borrower has been through bankruptcy.
One consumer shared:
I have argued numerous times that loan was discharged as part of my chapter 7 bankruptcy . They have collected monthly payments since then as part of the charge off, they have been reporting my account as late each month since then to the various credit agencies even though Ive been paying their agreed upon monthly payments. As per a number of recent cases, it has been determined that in fact the loans were dischargeable.
Another consumer wrote:
Another consumer wrote:
Student loan companies cannot collect debts that a consumer no longer owes. As noted above, certain types of education loans are dischargeable in bankruptcy without the higher standard and without the filing of an adversary proceeding. Collecting on debts that have been discharged through bankruptcy might not only violate the Consumer Financial Protection Acts prohibition on unfair, deceptive, and abusive practicesit could also violate the order of a United States bankruptcy judge.
These complaints raise serious concerns about the practices of private student loan owners, lenders, servicers, and collectors and their handling of bankruptcy discharges.
Has Your Loan Been Discharged?
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Duration Of Undue Hardship
The second prong of the Brunner Test requires the borrowers inability to repay the debt must be likely to continue for a significant portion of the repayment term of the loan. Just how long is a significant portion of a loans repayment term?The judges ruling in Brunner v. New York Higher Education Services Corporation indicated that the repayment term is generally ten years:
- After all, it is not unreasonable to hold that committing the debtor to a life of poverty for the term of the loan generally ten years imposes “undue” hardship.
But when the Brunner Test was issued, in 1987, student loans could be discharged after five years without requiring a showing of undue hardship. This suggests that a significant portion of the repayment term is less than five years. Otherwise, borrowers could have obtained a discharge after five years without needing to demonstrate undue hardship. A showing of undue hardship was necessary only if the borrower wanted to discharge their federal or private student loans in less than five years. A five-year standard has been used in other discharge options for federal student loans, such as Total and Permanent Disability Discharge. See 20 USC 1087. So it would be reasonable for the U.S. Department of Education to decide that student loan discharge in bankruptcy is legal when the borrowers situation is of a permanent character and has lasted for at least five years.
Possible Alternatives To Student Loan Bankruptcy
Filing for bankruptcy can definitely bring some much-needed relief if youre struggling financially. However, the consequences of filing for bankruptcy are long-lasting, which is why it should be your last resort.
If the main issue at hand is that youre unable to keep up with your student loan payments, but are okay balancing everything else without them in the picture, make sure you explore the following options before you make a decision.
- Contact consumer advocacy organizations. If youre worried about defaulting on your student loans, national organizations can help you apply for repayment options, investigate debt payoff plans or explore loan rehabilitation.
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How To File For Bankruptcy On Student Loans
Federal Loans And Hardship
Your student loan holder may choose not to oppose your petition to have your loans discharged in bankruptcy court if it believes your circumstances constitute undue hardship. Even if your loan holder doesn’t, it may still choose not to oppose your petition after evaluating the cost of undue hardship litigation.
For federal loans, the Department of Education allows a loan holder to accept an undue hardship claim if the costs to pursue the litigation exceed one-third of the total amount owed on the loan, including principal, interest, and collection costs. Private student lenders are likely to apply similar logic.
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What Happens If The Bankruptcy Court Doesnt Discharge My Loans
Once you move forward with Chapter 7 or Chapter 13 bankruptcy, four possible scenarios might play out. You could see all of your student loans and other debts wiped away completely, your loan could be partially discharged or you could have to repay your loan under better terms, such as with a lower interest rate or monthly payment.
You may also fail at having the terms of your loans changed at all during bankruptcy proceedings, which is a possibility you should be aware of.
If the courts do not find your claim of undue hardship adequate to qualify for bankruptcy, you may have no choice but to carry on in an effort to repay your loans.
Student Loans And The Current Bankruptcy Code 2021
$1.57 trillion. This is the total amount of money 42.9 million Americans owe in student loan debt, and the total is not getting any smaller. In fact, student loan debt in the United States is growing at a rate six times faster than national gross domestic product . This enormous financial burden on so many Americans calls for action from our policymakers.
For the first time since 1998, congress is talking about student loan relief. The Senate Judiciary committee has recently introduced the Fresh Start Through Bankruptcy Act. This bipartisan bill aims to overhaul the current student loan system by making it easier for individuals to discharge their federal student loans though bankruptcy.
President Joe Biden announced that he will extend the national student loan forbearance until May 1, 2022. The extension is due to the recent spread of Omicron variant which is only expected to surge as winter progresses. The administration said this 90-day extension will be the final push for student loans. Many Americans hope this will not be the only relief they see in regards to their student loans.
The Upcoming Student Loan Discharge
If you were to ask a person on the street about bankruptcy, one of the most well-known rules is you cannot discharge student loans.
In 2005, the Bankruptcy Code was amended under a law called the Bankruptcy Abuse Prevention and Consumer Protection Act . In that law, student loan debt was categorized as non-dischargeable under federal statute. The only silver lining for individuals hoping to discharge student loans was that the section said the loans could not be discharged unless it would impose an undue hardship.
Like many laws written by Congress, this language was left for Courts to interpret. Some courts have been favorable to students and have discharged student loan debt in certain circumstances some have not. The one unifying factor for all courts has been that if you want to attempt to discharge your student loans, it will take time and money and there are no guarantees.
Many politicians, both Democrats and Republicans, have campaigned on the issue of student loan debt. Some have even introduced bills in Congress to change the U.S. Bankruptcy Code, but those bills rarely see the light of day.
Since 2005, the promise of real change for the millions of Americans saddled with student loan debt has seemed more of a promise than a reality.
Why is this Different?
So why is FRESH START any different from the campaign promises or previous bills proposed for student loan debt?
What should people do now?
Is Student Loan Discharge In Bankruptcy Legal
Discharging student loans in bankruptcy is legally possible. But in practice, it’s very rare. Only 0.04% of student loan borrowers who file for bankruptcy succeed in getting a full or partial discharge of their student loans. Many dont even try to get their student loans discharged because of the expense and difficulty in qualifying for a discharge. The U.S. Bankruptcy Code at 11 USC 523 provides an exception to discharge of certain student loans. It blocks student loan discharge in bankruptcy unless the borrower is able to prove that keeping the debts “would impose an undue hardship on the debtor and the debtors dependents.
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Student Loan Borrowers Share Concerning Stories About Industry Collecting On Discharged Debt
The United States Bankruptcy Code provides important relief for debt-burdened consumers who need a fresh start to get their finances in order. This protection is particularly important for consumers who have been burdened by decades-old student debt, many of whom may have been subject to predatory practices.
For too long, a myth has persisted that student loans are not dischargeable in bankruptcy. The myth is not true because, in fact, student loans can be discharged bankruptcy. We have seen the Department of Education take important steps to ensure that bankruptcy relief is available to federal student loan borrowers. It is vital that private student loan borrowers also receive the relief the Bankruptcy Code provides and that loan owners, lenders, servicers, and debt collectors honor that relief when a bankruptcy judge discharges a consumers debts.
Inconsistent Signals From The Biden Administration On Student Loan Bankruptcy Reform
So far, the Biden administration has not implemented reforms to its student loan bankruptcy policies. And instead, it has seemingly continued to vigorously oppose borrowers who are seeking to discharge their federal student loans in bankruptcy.
Last month, a bankruptcy court in Delaware approved a borrowers discharge request of approximately $100,000 in student loan debt, over the Departments opposition. The judge based her ruling, in part, on the borrowers long-running medical problems, which she found constituted an undue hardship. The case was Wolfson v. Department of Education.
But in a subsequent move that surprised student loan borrower advocates, the Department of Education appealed the Wolfson ruling. After widespread outcry, the Department then abruptly reversed its decision. We’re working hard to deliver relief to student loan borrowers… We will withdraw the appeal in the Wolfson bankruptcy case review how we handle future claims, wrote Under Secretary of Education James Kvaal in a last week.
After the Biden administration appealed yet another favorable student loan bankruptcy ruling, the Department reversed itself yet again. The Department is committed to fixing student loan bankruptcy, tweeted Under Secretary Kvaal yesterday. In the case of Wheat v. Great Lakes Higher Education Corp., does not support an appeal and understands that the notice of appeal was filed by as a procedural matter. We have asked that the notice be withdrawn.
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Biden Administration Had Suggested That Student Loan Bankruptcy Reform Might Be Coming
U.S. Department of Education Federal Student Aid chief operating officer Richard Cordray told members of Congress at a hearing last year that the Department of Educations current approach to federal student loan bankruptcy discharges is less than ideal for borrowers, and needs to change. The process doesnt work well, he testified. needs to be reformed and were committed to doing that.
Cordray suggested, without providing much in the way of specifics, that the Biden administration was exploring options for modifying how the Education Department approaches bankruptcy proceedings that involve federal student loan discharge requests. Bankruptcy reform advocates have suggested several possible options for the administration to consider, including simply not opposing borrowers in bankruptcy adversary proceedings if they meet certain criteria for example, if the borrower can demonstrate a persistent state of poverty or ongoing reliance on public benefits as their primary or only means of support. While the Biden administration cannot change the bankruptcy code itself , exercising discretion and choosing not to engage in the adversary process could be a game-changer for many borrowers.
Can You Get Out Of Student Loans Through Bankruptcy
Yes, it is possible to get out of student loans through bankruptcy, though not always guaranteed, and it’s a complicated process with adverse consequences. Before deciding to get out of student loans through bankruptcy, seek counsel from appropriate sources, and if student loans are your only financial burden, then it is better not to try and get out of them through bankruptcy.
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Using Bankruptcy To Get Out Of Credit Card Debt
While bankruptcy is one way to get out of insurmountable , and while bankruptcy might be your best solution, you should exhaust other options. Before you choose bankruptcy, you should try to pay off your debt amounts using the snowball method. You can also consolidate your credit onto a low-interest account, and you can work with your creditors to lower the amount that you owe. You should always contact your creditors before you try to file for bankruptcy because you might find a solution. Creditors would rather get some of their money back than completely lose out because you file for bankruptcy, so they might be open to offering a hardship program.
When youre not sure if bankruptcy is the right option for you, take a close look at all of your debt before making any decisions.
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