Proposed Fresh Start Through Bankruptcy Act
The US Senate is considering a new, bipartisan bill that would allow borrowers to discharge their student loan debt in bankruptcy. The Fresh Start Through Bankruptcy Act of 2021 would amend the current bankruptcy code so that federal student loans could be eligible for discharge in bankruptcy after 10 years. The bill is being discussed as a potential alternative to student loan forgiveness. Senator Richard Durbin (D-IL) and Senator John Cornyn (R-TX) sponsored the Fresh Start Bill.
Current Undue Hardship Standard
Under the current bankruptcy code, student loan debts are presumptively non-dischargeable; however, if a borrower can prove that they have an undue hardship, student loan debt may be discharged through bankruptcy. This can be a challenging legal standard to meet. Most courts have adopted the Brunner Test which requires borrowers to show, among other things, a certainty of hopelessness in order to prove that they have an undue hardship. Under current bankruptcy practices, borrowers must also initiate an adversary proceeding (a lawsuit against the student loan lender) and argue against the lender in court. Adversary proceedings can be lengthy, expensive, and invasive.
Proposed Changes
The Fresh Start Through Bankruptcy Act would allow borrowers to discharge their federal student loan debt in bankruptcy without having to prove undue hardship. Borrowers would have to have been in loan repayment for at least 10 years – this waiting period is designed to prevent borrowers from trying to cancel their student loan debt immediately after graduation. For borrowers who have had federal student loan debt for less than 10 years, the existing undue hardship standard would stay in place.
Additionally, colleges and universities would be responsible for repaying a portion of the remaining student loan balance, so that the financial burden wouldn’t fall entirely on the federal government. The Fresh Start Bill would require schools that have more than 1/3 of their students receiving federal loans to partially refund the government. This would apply especially for schools whose graduates have high student loan defaults and low repayment rates.
Potential Drawbacks
The bankruptcy reform bill is an alternative to canceling student loan debt and can help provide a long-term path to financial stability. But filing for bankruptcy may seem like an extreme option to some. Chapter 7 bankruptcy requires borrowers to liquidate any assets and investments that cannot be protected through exemptions to pay off their debts. Chapter 13 bankruptcy restructures debt and proposes to pay back that debt over a 3-5 year period. Filing for bankruptcy can impact your credit score; however, so can defaulting on your student loans and being subject to a debt collection lawsuit.
Have Questions? Contact Burrow & Associates’ Bankruptcy Team
Burrow & Associates will be following the voting on the Fresh Start Through Bankruptcy Act, and we will share any significant updates with you. In the meantime, if you have any questions about the Fresh Start Bill, or discharging student loan debt through bankruptcy, please reach out to our bankruptcy team. We have convenient bankruptcy office locations in Athens, Conyers, Duluth, Gainesville, Kennesaw, and Morrow. You can contact us at (678) 323-2394 or via our website to set up a free consultation. We’re currently running a promotion and will file your bankruptcy case for NO MONEY DOWN.