The Student Loan Bankruptcy Law Update

Stuart Bankruptcy Lawyer

The number of student loan borrowers is astounding.  There are currently 44 million student loan borrowers owing approximately $1.5 trillion in student loan debt!  The total student loan debt has more than doubled in the last ten years.  Student loan debt now exceeds both automobile loans and credit card debt.

Student loan debt knows no age.   It affects both young and old.  Borrowers 50 years old or more owe $250 billion in student loan debt.  Nearly ¾ of 2019 graduates owe an average of $30,000 in student loans.

11% of student loan borrowers are in default.  And only 60% of student loan borrowers are making payments.

Legislative Efforts

Congress has taken notice of the mountain of student loan debt in recent years.  Last year two bills were introduced in the House of Representatives which sought to address the student debt problem. 

On January 24, 2019, John Katko introduced House Bill 770 which is entitled “Discharge Student Loans in Bankruptcy Act of 2019.”  On May 9, 2019, Jerrold Nadler introduced House Bill 2648 which is entitled “Student Borrower Bankruptcy Relief Act of 2019.”.

Both bills seek to change the Bankruptcy Code as it relates to student loans.  A bankruptcy case ordinarily ends with a discharge of the debtor’s debts.  However, the Bankruptcy Code excludes certain types of debts from the discharge. 

House Bills 770 and 2648 would eliminate the discharge exception in Bankruptcy for student loans.  11 U.S.C. Section 523(a)(8) currently makes student loans nondischargeable unless the loans impose an “undue hardship” on the debtor and her dependents.  House Bills 770 and 2648 would simply remove subsection (8) from the Bankruptcy Code.

If passed, these house bills would completely change how student loans are treated in bankruptcy.  These bills would make the student loans dischargeable like any other ordinary debt.  No action beyond filing the bankruptcy case would be needed to discharge the student loan. 

Adversary Proceeding to Discharge Student Loan Debt

Currently an adversary proceeding must be filed in order to seek a discharge of student loans.  An adversary proceeding is a lawsuit within the bankruptcy case.  An adversary proceeding often means more attorney fee costs for the debtor as it is a lot more work for her attorney.  The added costs of the adversary proceeding deter some debtors from even attempting to discharge their student loans. 

Debtor must show in the adversary proceeding that payment of the student loans would impose an “undue hardship” on her.  The standard for “undue hardship” varies in different parts of the country.  Generally, the “undue hardship” standard is very difficult to meet.  As such, student loans are not discharged often in bankruptcy.         

Conclusion

Student loans were previously dischargeable in Bankruptcy like ordinary debts.   The house bills discussed above would simply return the Bankruptcy Code to a time before the introduction of the “undue hardship” requirement.  Clearly, House Bills 770 and 2648 would make a huge difference for millions of borrowers.  Follow my blog for future updates on these house bills.

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