Discharging student loan debt through a consumer bankruptcy case has been next to impossible for borrowers facing a financial crisis. Bankruptcy reform advocates have been calling upon lawmakers to make this process easier for student loan borrowers with no success. Recently, several prominent Democrat lawmakers have called upon the president to help make these reforms through executive action. In addition, they have also sent separate requests to two federal agencies to do the same.
In order to receive a discharge for their federal student loan debt, borrowers facing a bankruptcy proceeding have been required to file a separate legal action within their already open bankruptcy case and to prove that they would suffer an “undue hardship” if forced to continue paying on their student loan debt.
The problem with this requirement is that no standard test has been set under the U.S. Bankruptcy Code for what qualifies as an “undue hardship.” As a result, bankruptcy courts across the country have created their own standards, but none of these standards are uniform. Additionally, proving the “undue hardship” has been extremely difficult for most borrowers, making the test impossible to meet.
The test most commonly used method for determining undue hardship has been the Brunner Test, which is a three-pronged test requiring the student loan borrower to file an adversarial proceeding against the lender within the bankruptcy case.
Lawmakers also believe that the federal government’s aggressive litigation tactics when fighting a petition to discharge the debt have made the ability for borrowers to pursue an undue hardship claim that much more difficult. In a letter issued last week by Senate Majority Whip Dick Durbin (D-IL), Senate Majority Leader Chuck Schumer (D-NY), and Senator Patty Murray (D-WA) to the Education Secretary Miguel Cardona and Attorney General Merrick Garland, lawmakers argued that the federal government’s contesting of these petitions make the situation worse. Essentially, by fighting the discharge, the lender is requiring the borrower to demonstrate a certainty of hopelessness in his or her ability to pay back the loan while still paying necessary living expenses.
Other lawmakers, including Senator Elizabeth Warren (D-MA) claim that the U.S. bankruptcy system is “fundamentally wrong” when it comes to discharging student loan debt. The adversarial proceeding often forces the borrowers to act as their own attorneys and negotiate directly with the student loan service provider, which most of them are not prepared to do. Rarely are borrowers successful when put in this position.
Lawmakers are asking the Department of Education to define what is considered undue hardship in a way that is more debtor friendly.
Bipartisan legislation has been introduced through the “Fresh Start through Bankruptcy Act of 2021,” which was created to help borrowers seek a discharge for their student loans through bankruptcy. Through this legislation, borrowers would become eligible for bankruptcy discharge if 10 years had passed since the borrower’s first student loan payment became due. If a borrower had a loan that was not 10 years old, they would need to go through the current process already in place.
The administration has not yet responded to the communication sent by lawmakers regarding bankruptcy reform.
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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.
