Student Loan Relief -Fresh Start Through Bankruptcy Act

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Author: Bailey Bickford

Senators Dick Durbin (D-IL) and John Cornyn (R-TX) have introduced the “Fresh Start Through Bankruptcy Act,” the first bipartisan bankruptcy legislation to come through the Senate in years. The Act also has the endorsement of the National Association of Consumer Bankruptcy Attorneys. The Act would allow student borrowers to discharge federal student loans, something that has not been possible since before 1998. The Act however, does not alter the dischargeability of private student loans.

Currently, the Bankruptcy Code does allow for the discharge of both federal and private student loans in limited circumstances. Debtors must bring an adversary proceeding against their loan servicer and prove an undue hardship in order to get a discharge. There is no clear definition of what constitutes an undue hardship, so courts have come up with various legal tests, but it is a nearly impossible burden for the Debtor to meet. Further, an adversary proceeding is a lengthy and expensive litigation that is practically guaranteed to be fought by the loan servicer.

The Act would eliminate the need for Debtors to pursue adversary proceedings in order to discharge government student loans. However, Debtors would not be eligible for discharge of their student loans until they have been in payment for a ten year “waiting period,” similar to how student loans were treated in bankruptcy prior to 1998. This waiting period would disallow borrowers from seeking a discharge immediately upon graduation from their degree program. While the Act still presents hurdles for borrowers to discharge their student loans, an avenue to discharge without an adversary proceeding is much better for borrowers than what the current Bankruptcy Code allows.

This Act would bring huge relief to the 45 million Americans holding more than $1.7 trillion in student debt. It is encouraging to see the Act’s bipartisan sponsorship in the Senate, which will hopefully lead to its swift passing into law.

If you have questions about your own current student loan situation, including what to do when the moratorium ends on January 31, 2022, please reach out to us.