Massachusetts Senator Elizabeth Warren has filed a bill in the United States Senate that would allow debtors in Bankruptcy Court to include student loans in their bankruptcy petitions. Senator Warren, along with Illinois Senator Dick Durbin, filed the legislation because they feel that the Bankruptcy Act of 2005 should be amended to allow student loans to qualify for discharge when debtors get a fresh start from a bankruptcy discharge.
As it stands, discharging student loans is extremely difficult. Prior to 1976, discharging a student loan was the same as discharging any other debt. Then, our lawmakers, in their wisdom, felt that folks may be taking advantage of the bankruptcy laws. So the law was changed. The 2005 update to the law did not have any effect on this.
How Can you Discharge a Student Loan in Bankruptcy?
To discharge a student loan in personal bankruptcy, you need to prove that repayment would cause an undue hardship. This could be an undue hardship on you or your dependents. That is, if you were to repay the loan, you would not be able to sustain a minimal standard of living. Or, you can show that this hardship would continue for a significant portion of the repayment period. Furthermore, you need to be able to show that you made good faith efforts to repay the student loan prior to filing for bankruptcy. What does that mean? Usually that you have had a repayment period for a minimum of five (5) years.
The procedure to discharge your student loans starts with contacting an experienced bankruptcy attorney. This is because you have to file a bankruptcy petition to request that all of your debt be discharged. Next, you have to file a separate complaint in the Bankruptcy Court called an Adversary Proceeding. There are significant costs for this – a filing fee and attorney fees to prosecute a case which is against the United States Attorney’s Office. The Assistant United States Attorney that would get assigned to the case is a prosecutor; not someone who is focused on helping debtors. He or she has virtually unlimited resources, which include briefs and support from the Department of Justice in Washington.
What is Massachusetts Senator Warren’s Proposal?
From what we understand, Senator Warren wants student loans to be more like mortgages. The Consumer Financial Protection Bureau, which Ms. Warren founded and ran for a number of years, issued a report last year urging Congress to roll back the bankruptcy restrictions.
Senator Warren also proposed that the interest rates be reduced; she argued that it’s counterproductive for recent graduates, and folks that take out loans but don’t graduate, to pay significant interest on student loans.
Senator Warren wants school with significantly high student loan default rates to be penalized. It is clear, when you look at the data, that some schools are set up as a mill for processing student loans – folks are admitted who can never graduate, or who graduate and have no additional skills, and those schools have a high default rate.
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