Significant bipartisan bill to pay off student loan in case of bankruptcy: key details

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The new bipartisan bill, which will be submitted to the Senate, will allow borrowers to pay off student loan debt through bankruptcy.

The bill, dubbed the Blank Slate Bankruptcy Law, will amend the bankruptcy code to make it easier to pay off student loans under certain conditions. The bill is sponsored by Senator Richard Durbin (Illinois) and Senator John Cornin (Texas).

While it is not impossible to pay off student loan debt through bankruptcy under current law, it can be quite difficult. To do this, most borrowers need to be shown that they are experiencing “unreasonable hardship”, which is a difficult legal threshold that must be overcome. The bankruptcy code itself does not adequately define what constitutes “undue hardship” at all, so courts have created tests (which vary slightly by jurisdiction) to help judges decide whether a borrower meets rigorous standards. In many jurisdictions, borrowers must prove that there is a “certainty of hopelessness” in their circumstances, which is often an impossible task.

Proof of undue difficulty also creates additional barriers for borrowers. A borrower seeking to pay off student loan debt through bankruptcy must initiate so-called “adversarial proceedings” – which is essentially a bankruptcy lawsuit against student loan lenders – to prove his case. Student loan lenders will in most cases object to the borrower’s argument. Counteraction can be a long, costly and highly invasive process. Student loan lenders, including the federal government, often have significantly more resources than borrowers, giving them a tactical advantage. As a result, many student loan borrowers fail to succeed and others don’t even try.

A new bankruptcy reform bill will change this by allowing federal student loans to be paid off in the event of bankruptcy without having to prove undue hardship. The bill requires borrowers seeking repayment to repay their loans for at least the past 10 years. This so-called “waiting period” will reflect earlier bankruptcy legal standards for student loans before Congress passes legislation setting the standard for excessive hardship. It is designed to prevent borrowers from trying to repay or cancel their student loans for several years immediately after graduation.

“This is new to America. This was not the case before. Until 1976, student loans were treated as other types of unsecured bankruptcy debt. If you were to face financial ruin, you might be relieved, ”Senator Durbin said in his speech today before the Senate Judicial Committee. Now “it’s almost impossible to prove excessive hardship … Excessive hardship should not be the only way to deal with student loans in the event of bankruptcy. There must be another option. We have to go back to what it was before 1998, when borrowers could also seek help after a long waiting period. That system worked … That is why today I am submitting a bill to Senator Kornin: A clean slate bankruptcy law … will restore student loan borrowers’ ability to repay federal student loans after a waiting period of ten years. And it will combine this reform with a measure of accountability for schools that have consistently high default rates. ”

The fact that the bill is supported by both parties is significant and suggests that it may have a real chance to pass Congress and become law. “This is an important point,” Durbin said today. “I introduced student loan bankruptcy. [bills] for a long time. This is the first time he has been bipartisan. In this bill, we see growing bipartisan agreement that the status quo is not working and that we need bankruptcy reform on student loans. ”

The legislative text of the bill is due to be released in the coming days, which will provide more details on the details of the reform proposals.

Further reading

Student Loan Cancellation Debate Continues Due to Service Disruptions

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

Huge shake-up in student loan service: this major loan service center ends its contract

Has the Biden administration just sent a big signal to cancel the student loan?

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