Under current federal law, student loan debt is not dischargeable in bankruptcy except under certain circumstances where the debtor borrower is able to establish “undue hardship” if the loan is not discharged. Undue hardship is proven using what the Bankruptcy Court refers to as the Brunner Test. Under the Brunner Test, the three following criteria must be met to have an "undue hardship" finding: 1) continuing to pay the loan will cause the debtor the inability to sustain a minimum standard of living, 2) the debtor’s financial situation is unlikely to change in the future, and 3) the debtor has made a good-faith effort to pay his or her student loans.
Proving undue hardship is a difficult standard to meet, and requires the debtor to go through another step or hurdle by instituting what’s called an “adversary proceeding.” An adversary proceeding is basically a lawsuit, which in this context, is brought against the student loan lenders within the bankruptcy case. The lenders will aggressively dispute and challenge the debtor’s allegations, thereby making the whole process very long and expensive. Moreover, the lenders, including the federal government, have infinitely more resources to continue fighting the claims made by the debtor, thereby drastically reducing the likelihood of the student loan debt being discharged.
In order to give student debtors a fair chance, the Fresh Start Through Bankruptcy Act of 2021 (“FSTBA”) bipartisan bill was introduced. The FSTBA, if passed, will allow debtors to seek a bankruptcy discharge of their federal student loans without having to prove undue hardship.
The FSTBA in essence would make student loans eligible for bankruptcy discharge ten years after the first loan payment is due and will require some Institutes of Higher Education that receive a certain amount of federally-backed student loans to repay a portion of discharged federal student loans to the taxpayer, in a new cost-sharing structure. Furthermore, there will be increased accountability of colleges that have more than one-third of their students receiving federal student loans. These colleges will be required to refund the government partially if a student’s loan is later discharged in bankruptcy. Please note, however, that the existing undue hardship requirement for student loans that have been due for less than ten years will still be available to those who do not meet the minimum standards required by the FSTBA.
Since the FSTBA is a bill introduced by both political parties, this increases the chances that it will be approved and enacted into law. The FSTBA will provide an option for student debtors who have no realistic path to pay back their student loan debt, thereby allowing them to get back on their feet and have a more positive outlook towards their future.
If you have any questions or would like to begin the bankruptcy process, please contact the professionals at Ananian Law Group.
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