Supreme Court Dismisses Student Loan Bankruptcy Case, Leaving Harsh Regulations Unchanged for Now

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United States Supreme Court refused hear a case raising questions about whether student loans can be repaid in the event of bankruptcy, leaving the stringent student loan bankruptcy standards for now.

A business, Conti vs. Arrowood Indemnity Co., involved a borrower who was trying to pay off his private student loan in bankruptcy. Conti, the borrower, attended the University of Michigan and took out private student loans from Citibank totaling over $ 76,000. The loan applications listed the debt as educational debt of “students attending four-year colleges and universities” and the promissory notes stated that “proceeds from this loan should be used for specific education expenses.” The loans were made directly to the university, and none of the payments exceeded the total cost of the tuition.

In 2017, Conti filed for bankruptcy and listed Citibank loans as repayable. But the bankruptcy code treats student loans very differently than most other forms of consumer debt, such as credit cards or bad bills. In order to pay off student loans in the event of bankruptcy, borrowers generally have to prove that they are in “undue hardship,” which is a difficult standard to meet. These restrictions initially only applied to federal student loans, but were later expanded to cover private student loans (such as Conti) following the 2005 bankruptcy reform bill.

The standard of “undue hardship” is not clearly defined in the law, so bankruptcy courts have established several tests, which vary by scheme, to determine if a borrower can meet the standard. But to even try to show that they meet the “undue hardship” standard, student loan borrowers must initiate an “adversarial procedure,” which is essentially a bankruptcy lawsuit against the creditors concerned. Litigation can be a lengthy and invasive process for borrowers and can be quite costly for those who hire a private attorney. Student loan lenders may also have significantly more resources than borrowers, which can give them an edge. As a result, many student loan borrowers fail to prove overly difficult, and many others do not even try.

However, Conti has filed a lawsuit to avoid showing that she meets the “over-hardship” standard for student loans. Instead, she filed a lawsuit to try to prove that the private student loans were not “high school loans” within the meaning of the Bankruptcy Code due to questions and disputes about the exact cost of attendance, her student status, and her status. other applicable financial assistance. If successful, this strategy would potentially allow it to completely bypass the “over-hardship” standard.

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.

Conti has filed an appeal with the US Supreme Court. But on rejecting the case todayThe court actually upheld a tough bankruptcy code in relation to student loans.

Ultimately, when it comes to student loans and bankruptcy, Congress can act to bring about real reform. Earlier this year, Senate Democrats promulgated The Medical Bankruptcy Act of 2021, which will allow student loan borrowers to pay off their student debt in the event of bankruptcy without having to prove undue hardship. The bill would make a simple change to the bankruptcy code by simply removing the section that dealt with student loan debt differently.

Congressional Democrats have proposed similar bills in the past, but those proposals have not gone anywhere in the Republican-controlled Senate. Now that Democrats have small majorities in both houses of Congress, bankruptcy reform is more likely to succeed. But it’s unclear whether the student loan bankruptcy reform will get enough bipartisan support to overcome the would-be Republican pirate.

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

Will Biden cancel student loan debt? We will soon find out

Biden student loan forgiveness review: should you take steps now to cancel your student debt later?

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