If you were to ask a person on the street about bankruptcy, one of the most well-known rules is “you cannot discharge student loans.”
In 2005, the Bankruptcy Code was amended under a law called the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). In that law, student loan debt was categorized as non-dischargeable under federal statute. The only silver lining for individuals hoping to discharge student loans was that the section said the loans could not be discharged “unless it would impose an undue hardship.”
Like many laws written by Congress, this language was left for Courts to interpret. Some courts have been favorable to students and have discharged student loan debt in certain circumstances; some have not. The one unifying factor for all courts has been that if you want to attempt to discharge your student loans, it will take time and money and there are no guarantees.
Many politicians, both Democrats and Republicans, have campaigned on the issue of student loan debt. Some have even introduced bills in Congress to change the U.S. Bankruptcy Code, but those bills rarely see the light of day.
Since 2005, the promise of real change for the millions of Americans saddled with student loan debt has seemed more of a promise than a reality.
However, that reality may change. A bill has been introduced in the U.S. Senate titled the “Fostering Responsible Education Starts with Helping Students Through Accountability, Relief and Taxpayer Protection Through Bankruptcy Act of 2021.” This long-winded name is abbreviated as “FRESH START Through Bankruptcy Act,” which would change the language of the federal statute related to student loans and discharge through bankruptcy. It would still include the undue hardship provision that exists today, but it would also allow a discharge of student loan debt after a 10-year period of repayment exclusive of any suspensions.
Essentially this is a “good behavior” provision for debtors. A debtor who has completed a 10-year repayment plan could now seek to discharge the entire remaining student loan debt when he or she filed either a Chapter 7 or 13 Bankruptcy.
Why is this Different?
So why is FRESH START any different from the campaign promises or previous bills proposed for student loan debt?
As with anything in Washington, bipartisan politics are the key, and FRESH START has just that. The Bill was introduced by Senator Dick Durbin, a Democrat from Indiana, and Senator John Cornyn, a Republican from Texas. A quick search of the Congressional Record will show that Senators Durbin and Cornyn do not often see eye-to-eye on any issue, so the fact that these two have joined forces to propose this bill should give potential debtors hope.
If the issue of student loan debt can find bipartisan support, there is a real chance that an amendment to the Bankruptcy Code will occur. The joint sponsorship of this bill is a very good start.
What should people do now?
The main provision of this potential discharge is the 10-year repayment plan.
The bill does not specify any type of repayment plan, just that one is completed. If you have student loan debt but are not on a repayment plan, you should begin investigating potential plans now.
Federal student loan debt servicers offer several repayment plans. Find the one that best works for you and lock it in. It is important to start the clock. Those already on a repayment plan should determine when they started and if they have made all payments required under the plan.
The bill states that if it becomes law, the change to the Bankruptcy Code will occur 180 days after the law is signed. During that six-month ramp-up, it will be critical for debtors to know their student loan status and work with a bankruptcy attorney to be ready to file once the law comes into effect.
The attorneys at The Sader Law Firm are here to answer all questions people may have about the FRESH START Bill, student loans and any other bankruptcy provisions.