Major Bankruptcy Reform Bill Would Permit Student Loan Discharges And Make Other Dramatic Changes
Today, Senators Elizabeth Warren (D-MA), Dick Durbin (D-IL), and Sheldon Whitehouse (D-RI), along with several House Democrats, introduced the Consumer Bankruptcy Reform Act of 2020. This is the first major consumer bankruptcy reform legislation to be introduced into Congress since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. If passed, the bill would fundamentally change the entire bankruptcy system — particularly for student loan borrowers.
The current bankruptcy code treats student loan debt differently from most other forms of consumer debt, such as credit cards and medical bills. Borrowers must generally prove that they have an “undue hardship” in order to discharge their student loan debt in bankruptcy. These restrictions initially only applied to federal student loans, but were subsequently expanded to cover private student loans following the passage of a 2005 bankruptcy reform bill.
The “undue hardship” standard applied to student loan debt is not adequately defined in statute, so bankruptcy judges have established various tests (which vary by jurisdiction) to determine discharge eligibility. In order to show that they meet this standard, borrowers must initiate an “adversary proceeding,” which is essentially a lawsuit within the bankruptcy case that is brought against the borrower’s student loan lenders. Through the adversary proceeding, the borrower must present evidence showing that they meet the undue hardship standard, while the student lenders present opposing evidence. The adversary proceeding can be a long and invasive process for borrowers, and can get quite expensive for those who retain a private attorney. Student loan lenders may also have significantly more resources than borrowers, which can give them an edge in the litigation. As a result, many student loan borrowers are unsuccessful in proving undue hardship, and many others don’t even try.
The new bankruptcy reform bill would make a simple, but far-reaching, change to the bankruptcy code by simply eliminating the section of the code that exempts student loan debt from discharge. If enacted, student loans would be treated no differently from other forms of consumer debt, and could be discharged without an adversary proceeding, and without having to prove an “undue hardship.”
Among other things, the bill would also radically reform the bankruptcy system by replacing Chapter 7 and Chapter 13 bankruptcies with a single, unified bankruptcy process. It would create a uniform federal homestead exemption, rather than a patchwork of state exemptions. It would permit the discharge of certain government fees and fines. It would exempt sources of income and assets linked to alimony, child support income, the child tax credit, and the Earned Income Tax Credit. And it would crack down on predatory practices by lenders and creditors.
“Our Consumer Bankruptcy Reform Act simplifies and modernizes the consumer bankruptcy system to help people struggling with debt – starting by creating a single system for all consumers, streamlining the filing process, and reducing filing fees,” said Senator Warren. “I’ve sat in bankruptcy courtrooms and heard the stories of people who worked hard, had big dreams, and whose lives took a terrible turn. Bankruptcy is supposed to be a last resort to help people pull themselves back up. We must fix bankruptcy to give people a fighting chance.”
The bill has little chance of passing the Republican-controlled senate during the lame-duck session. But its chances could improve depending on the outcome of the January runoff elections in Georgia, which will determine which party controls the Senate after Joe Biden assumes the presidency on January 20.
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