New bill allows for the discharge of student loans in bankruptcy

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  • Dick Durbin and John Cornyn have introduced a bipartisan bill to help borrowers pay off student loans in bankruptcy.
  • The bill would remove the requirement to prove “undue hardship” after a 10-year waiting period.
  • Successfully proving hardship is rare and requires a lengthy and costly process for borrowers.
  • See more stories on the Insider business page.

If borrowers want to get rid of their student loans by going bankrupt, they have to prove an extreme circumstance to qualify, which is rare and difficult. A top Democrat and Republican want to change that.

Last week, Senate Majority Whip Dick Durbin and Senator John Cornyn of Texas introduced the FRESH START Through Bankruptcy Act of 2021, which would allow borrowers to apply for the release of their federal student loans after 10 years. Under federal law, according to their fact sheet, student debt can only be discharged through bankruptcy if the borrower can prove that he or she has been “unduly hard”. This bill would seek to eliminate this requirement for federal loans.

“Student loan debt follows you to your grave,” Durbin said in a declaration. “Our bipartisan bill finally gives student borrowers – some who have been misled into taking expensive loans by predatory for-profit colleges – a chance to get back on their feet when they have no other. realistic way to repay their loans, “he added.

In addition to making student loans eligible for bankruptcy after 10 years, the bill:

  • Retain the undue hardship option for private student loans and federal student loans that are less than ten years past due;
  • Require colleges with more than a third of their students receiving student loans to partially repay the government if a student’s loans are released from bankruptcy;
  • And offer bankruptcy as an option for borrowers who have no realistic way to pay off their “crushing” student debt.

Eliminating the undue hardship requirement would make it easier for borrowers to obtain release from their loan in the event of bankruptcy. Currently, borrowers must file a separate action, known as “adversarial procedure“, which is a lawsuit brought against their student loan company, but the process can be long and expensive, and the company usually has more resources than the borrower.

Since this bill enjoys bipartisan support and includes requirements for colleges to pay off the government in certain scenarios, it will likely have an easier path to Congress than full student debt forgiveness, which alone Democrats argue.

Last month the case Conti v. Arrowood Indemnity Co. was taken to the Supreme Court, in which a borrower with private student loans tried to release them through bankruptcy, but the court rejected her argument because she had not proven that she had suffered a undue hardship.

“Undue hardship should not be the only way to settle student loans in bankruptcy,” Durbin said in previous remarks. hearing last week. “There should be another option. We should go back to what it was before 1998, when borrowers could also apply for relief after a long waiting period.”

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