Is the day approaching when student loans will be dischargeable in bankruptcy?
Updated: Jul 3, 2019
From The Wall Street Journal May 10, 2019
Federal lawmakers on Thursday introduced a bill that would give student loan borrowers the power to leave that debt behind when they file for bankruptcy protection.
The proposal would enable bankrupt student loan borrowers to cancel that debt along with medical bills, credit-card debt and other payment obligations. Erasing student loans while in bankruptcy is very difficult, even for borrowers who face extreme financial difficulties.
The bill, Student Borrower Bankruptcy Relief Act of 2019, marks the first time Senate lawmakers have proposed giving student loan borrowers the power to cancel their federal student loans. Nationwide, there is roughly $1.5 trillion in federal student loans outstanding, according to the Federal Reserve Bank of New York. House lawmakers introduced a similar bill in 2017.
“Filing for bankruptcy should be a last resort, but for those student borrowers who have no realistic path to pay back their crushing student loan debt, it should be available as an option to help them get back on their feet,” Sen. Dick Durbin (D., Ill.), who introduced the bill with Elizabeth Warren (D., Mass.), said in a statement.
Reps. Jerrold Nadler (D., N.Y.) and John Katko (R., NY) introduced the bill in the U.S. House of Representatives.
Student debt in the U.S. has more than doubled over the past decade, according to figures from the New York Fed, and more borrowers are falling behind on payments.
Federal lawmakers in recent years have proposed a handful of bills that would give relief to student loan borrowers. Sen. Durbin, for example, has proposed a law to cancel private student loans—borrowers collectively owe more than $150 million—in 2011, 2015, 2017 and 2018. Other efforts would give indebted borrowers more power when dealing with lenders.
No major reform to the bankruptcy rules for student loans has been successful.
A 1976 law prohibits Americans with student loans from canceling that debt in bankruptcy unless they can prove they face an “undue hardship,” a term that Congress didn’t define.
Judges who interpreted the phrase, over time, set a high bar that makes it difficult to prove a borrower’s financial problems are severe enough to warrant loan cancellation.
In addition, a few student borrowers try to cancel their loans because it is an expensive process that often calls for them to hire a lawyer. Consumer bankruptcy lawyers say the cost can range from a few thousand dollars to more than $10,000.
Some bankruptcy judges said they are looking for ways to grant relief to student loan borrowers, whether by issuing rulings that could weaken the “undue hardship” standard broadly or by making repayment easier.