As the amount of student debt held by Americans continues to rise, the difficulty borrowers have in obtaining relief, even if they file for bankruptcy, has become increasingly evident. Lawmakers are exploring ways to reform student loan bankruptcy, with a consensus among Democrats, Republicans and pundits that Congress should partially reverse measures taken decades ago that made it harder for borrowers to l cancellation of their student loans.
Student loan debt is not treated like most other debts in bankruptcy court. Under current law, canceling federal student loans through bankruptcy is a complex process and requires courts to determine whether loan payments will result in “undue hardship,” a standard that does not exist. is not clearly defined in the bankruptcy code and that uses a test that has turned into “too strict and unequal an exercise,” said Christopher Chapman, president and CEO of the AccessLex Institute, in his testimony wrote during a Senate Judiciary Committee hearing held Tuesday. Known as the Brunner test, it requires proof that the debtor cannot maintain a minimum standard of living if he is forced to repay, which this state of affairs is likely to persist for a significant part of the period of payment. repayment and that the borrower has made a good faith effort to repay their loans.
“This is new in America,” said Senator Dick Durbin, Democrat of Illinois and chairman of the Judiciary Committee. âBefore, it wasn’t like that. If you were faced with financial ruin, you might get relief. We made a mistake in 1998.
In 1998, Congress eliminated the waiting period – the number of years a borrower would have to wait after their loans matured until they could file for bankruptcy – making the undue hardship standard the only way to pay off student loans. It’s a notoriously difficult standard to meet – the Public Law Center in Santa Ana, Calif., Has provided 5,000 bankruptcy consultations to debtors since 2012, but has only attempted to pay off federal student loans five times because that he knew the other cases would be unsuccessful, said Elizabeth Gonzalez, senior lawyer in the consumer law unit.
Durbin said undue hardship shouldn’t be the only way to settle student loans in bankruptcy. All five witnesses at the hearing on the matter agreed.
âIn the past, I have argued that it would not be necessary for Congress to reconsider the authorization to cancel student loans in bankruptcy, because of the more nuanced safety net that [income-driven repayment, known as IDR] provides, âsaid Beth Akers, senior researcher at the American Enterprise Institute. âHowever, the IDR needs serious reform. In the meantime, restoring the ability to have student loans – federal and private – discharged in bankruptcy under certain conditions would create an effective fix to the well-intentioned but inadequate IDR system.
Durbin and Senator John Cornyn, a Republican from Texas, are proposing the reinstatement of the waiting period in their legislation, the FRESH START Through Bankruptcy Act, announced at the hearing. The bill would allow borrowers to pay off their federal student loans through bankruptcy after 10 years and hold institutions with consistently high default rates to account. Cornyn said he believes there is a need for these measures to go hand in hand.
“Some schools have taken advantage of the US taxpayer for too long and it is the students who are exposing their excesses,” Cornyn said.
Illinois Attorney General Kwame Raoul specifically referred to the now defunct for-profit institutions Westwood College and ITT Technical Institute in his testimony as examples of universities where borrowers have been deceived and could benefit from the opportunity. to pay off their loans in the event of bankruptcy.
âIronically, a for-profit institution can take refuge by going bankrupt in a way that the students it tackles cannot,â said Raoul.
Enabling borrowers to pay off student loans in bankruptcy had the support of committee members on both sides of the aisle. Senator Richard Blumenthal, a Democrat from Connecticut, has said he wants to be part of the FRESH START law in the future. Senator Josh Hawley, a Republican from Missouri, said he thought the proposal made sense.
âWhile I do not support the cancellation of all student debt for the massive grant to wealthy Americans and universities, I do not see many good reasons to keep students in massive debt like lifelong serfs of banks and universities in not allowing them to discharge their bankruptcy debts under appropriate circumstances, âsaid Hawley.
Congress initially changed the way student loan debt is handled in bankruptcy to help combat abuse, although Durbin said the abuse allegations were anecdotal and not based on data. But Gonzalez said his clients are often ashamed to consider bankruptcy, and if they’ve reached that point in trying to pay off a student loan, it’s because they’ve exhausted all other options.
âDespite being so overwhelmed with debt, my clients are reluctant to even bring up bankruptcy in a meeting with me,â Gonzalez said. “There seems to be an agreement [among witnesses] that not only will students not rush to file for bankruptcy and pay off their student loans, but that the bankruptcy system has put protections in place against the abuse of the bankruptcy process.
Diane Barta, a former graduate student at for-profit Ashford University, testified that she had to file for Chapter 13 bankruptcy in 2012 after her husband lost his job. But that excluded the student loan debt she had, which currently stands at over $ 120,000 and is still struggling to pay off.
“If I had been able to pay off my loans in bankruptcy – as painful as the filing was – it would have been a great relief in the end,” Barta said. âI still wouldn’t have sleepless nights worrying about how I’m going to pay and what will happen to my kids, my husband and me if I can’t. “