Bankruptcy Student Loan Repayment? Courts disagree – but reform may be coming

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Recent bankruptcy decisions to pay off student loan debt have produced confusing and conflicting results for borrowers. But attempts to reform the bankruptcy code to make it easier to pay off student loans in bankruptcy continue.

In order to repay student loans in the event of bankruptcy, most borrowers must show that they are experiencing “excessive hardship,” which is a difficult standard and not clearly defined in the law. Bankruptcy courts have created legal “tests” that differ from jurisdiction to jurisdiction to help judges determine whether a borrower meets a standard of undue hardship.

But to prove unreasonable difficulties, borrowers must initiate an “adversarial procedure,” which is essentially a bankruptcy lawsuit against their creditors on student loans. Litigation with an adversary can be a lengthy and invasive process for borrowers, and it can be costly to hire a lawyer to assist. Student loan lenders often have significantly more resources than borrowers, which can provide an advantage. Consequently, many student loan borrowers fail to prove overly difficult, and many others refuse to go this route altogether.

Some borrowers have tried to get around the excessive distress standard. Earlier this month, the US Court of Appeals for the Second Circuit ruled that the student loan borrower can pay off his private student loans in the event of bankruptcy following a lawsuit with the opponent. However, instead of proving undue difficulty, the borrower was able to prove that the private student loans in question did not represent an “educational benefit” within the meaning of the Bankruptcy Code. The court rejected the student loan holder’s argument that the Bankruptcy Code prohibits the performance of an “obligation”.[s] for the payment of funds received as educational benefits ”covers almost all private student loans. “If Congress had intended to remove all education loans from the category [under this provision], he would not have done it in such unnatural terms, ”wrote the Appeals Panel in its decision. The Second District’s decision is consistent with similar decisions in several other jurisdictions, but the holding is narrow and only applies to certain private student loans. The vast majority of outstanding student loan debt is federal or government-funded.

In another recent event, the US Supreme Court refused an appeal case in which another private student loan borrower was denied to dismiss the bankruptcy case. This borrower did not file a lawsuit to show that it met the standard of excessive hardship, but to show that the private student loans were not “qualified education loans” within the meaning of the bankruptcy code (arguing similar to those that were in the Second District case) due to questions and disputes about the exact cost of attendance, her student status, and other related financial aid. However, the bankruptcy court rejected her arguments, and the federal district court and the federal appeals court of the sixth circuit confirmed. The Sixth Circuit concluded that the simple language of the loan application and promissory notes clearly showed that these were student loans and were thus not repayable in the event of bankruptcy, without undue indication of undue difficulty. The refusal of the Supreme Court to consider the case actually left the standard of unjustified imprisonment unchanged.

The aforementioned cases show that while it is possible to pay off student loan debt in the event of bankruptcy, it remains quite difficult for many borrowers. This is especially true for federal student loan borrowers who may not necessarily use the same legal arguments used in the Second District case to get around the standard of excessive hardship. These borrowers often also face crushing opposition from the Department of Education in the claim.

One solution would be for Congress to amend the bankruptcy code to completely abolish unreasonable claims for repayment of student loan arrears. Earlier this year, Senate Democrats came out The Medical Bankruptcy Law of 2021, which will allow borrowers to pay off their student loans through bankruptcy without having to prove undue hardship. The bill would simply change the bankruptcy code and remove the section that treats student loan debt differently from other consumer debt repayable. Polls show student loan bankruptcy reform is popular; but recent poll According to Data For Progress, 61% of respondents were in favor of amendments to the bankruptcy code so that student loan debt is treated in the same way as other forms of consumer debt in bankruptcy.

Senate Judiciary Committee Chairman Dick Durbin, Illinois, announced this week that the committee will hold a hearing on student loans and bankruptcy reform on Aug. 3. Advocates of the student loan bankruptcy reform praised the move.

“We are grateful to Senator Durbin and the committee’s commitment to exploring how Congress and the Department of Education can take meaningful steps to ensure that student loan borrowers facing bankruptcy can get a second chance and get on with their lives,” Student said. Defense President Aaron Ament.

Further reading

Biden administration will make it easier for student loan borrowers to obtain mortgage loans

Biden Administration Announces Significant Renewal of Income Based Loan Repayment and Student Loan Forgiveness Programs

Student Loan Mess Coming: Borrowers, Do These 6 Things By September

The chances that Biden will extend the pause in paying off his student loan have just increased – a lot

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