student loan debt, Student Loans

Facing a Broken Student Loan System Borrowers Set Hopes on New Reform Bill

The student loan system has been considered broken for quite some time, and while many reform efforts have been made to help improve the process, nothing has been successful thus far. However, a new student loan reform bill could signal meaningful change is on the way.

This reform bill focuses on how student loan debt is handled in bankruptcy. Traditionally, student loans are non-dischargeable in a personal bankruptcy case, unless a specific set of criteria are met. The “Consumer Bankruptcy Reform Act of 2020,” proposed by House Judiciary Committee Chairman Jerry Nadler (D-NY) and Senator Elizabeth Warren (D-MA) proposes a way to make this process easier, allowing more student loans to be discharged through personal bankruptcy. The bill addresses both Chapter 7 and Chapter 13 bankruptcy cases and proposes changing the current systems under each chapter by one system, entitled Chapter 10.  

Specifically, the legislation proposes to amend Title 11 of the United States Bankruptcy Code by adding this new Chapter 10. The provisions of Chapter 10 would open doors for student loans, including federal and private, to be discharged in a consumer bankruptcy case.  

The hope behind the new legislation is that student loan debt will be put on equal ground with other forms of consumer debt, including credit card debt and medical bills. These forms of debt are already easily dischargeable under both forms of bankruptcy, while student loan debt is not. 

The fact that their student loan debts will likely not be discharged is a common reason expressed by consumers as to why they do not pursue a bankruptcy case, no matter how much they are struggling financially. Even if these individuals filed for bankruptcy and were able to successfully discharge most of their unsecured debts, they would remain on the hook for the debt that arguably is their largest and provides the most financial stress, their student loans.  

In recent months, many borrowers have been able to successfully prevail in filing a legal claim in their bankruptcy cases to discharge their student loan debts. However, courts tend to not apply a consistent standard in the “undue hardship” test that must be met for the debt to be discharged. 

Recently, borrowers have had success in discharging their private student loans, albeit in only a few cases. These rulings could signal the fact that bankruptcy judges are sympathetic to the harsh standards student borrowers must meet to escape this debt.  

According to financial experts, if this bill is successful and passes, more than $3 billion in private student loans alone that have already been through the bankruptcy system could become eligible for cancellation. 

President-elect Joe Biden has expressed support in reforming the student lending system, including how student debt is handled in bankruptcy. Not surprisingly, student loan servicers are against this reform, preferring the current system.  Many of them prefer borrowers to enter into payment agreements in lieu of completely discharging the debt.  

The current legislation is just one of many various proposals made over the last several years. While it is not clear whether this effort will be successful, it is certain that this one will not be the last move made to reform the student loan debt system.  

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For borrowers who are struggling with student loan debt, relief options are available.  Many student loan borrowers are unaware that they have rights and repayment options available to them, such as postponement of loan payments, reduction of payments or even a complete discharge of the debt. There are ways to file for bankruptcy with student loan debt.  It is important you contact an experienced Miami bankruptcy attorney who can advise you of all your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com. 

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