Senators unveil sweeping bill to write off student loan and medical debt in bankruptcy

Democratic senators this week unveiled a bankruptcy bill that would drastically reform the U.S. bankruptcy system and make it easier for struggling Americans to pay off student loans and medical debt through bankruptcy.

The Medical Bankruptcy Fairness Act of 2021, proposed in response to the economic fallout from the ongoing COVID-19 pandemic, would bring substantial reforms to the bankruptcy code. The law project :

  • Create a more accommodating bankruptcy process for Americans forced into bankruptcy because of medical debts or because they lost their jobs due to a public health shutdown.
  • Give up procedural hurdles like credit counseling, which is currently required for most people going bankrupt. Supporters of the bill argue that credit counseling is meaningless to those who are being driven into uninvited bankruptcy.
  • Increase protections for people’s homes by allowing retention of at least $ 250,000 of home equity.
  • Allow student loan borrowers to pay off student debt in the event of bankruptcy.

The current bankruptcy code treats student loan debt differently from most other forms of consumer debt, such as credit cards and medical bills. Borrowers usually have to prove they have “undue hardship” in order to pay off their student loan debt in bankruptcy. These restrictions initially applied only to federal student loans, but were later extended to cover private student loans following the passage of a bankruptcy reform bill in 2005.

The “undue hardship” standard applied to student loan debt is not adequately defined in law, so bankruptcy judges have established various tests (which vary by jurisdiction) to determine eligibility for credit. the Liberation. In order to show that they meet this standard, borrowers must initiate “adversarial proceedings,” which is essentially legal action in bankruptcy proceedings against the borrower’s student lenders. In adversarial proceedings, the borrower must present evidence demonstrating that they meet the undue hardship standard, while student lenders present evidence to the contrary. Adversarial proceedings can be a long and invasive process for borrowers, and can be quite expensive for those who use private attorneys. Student lenders may also have significantly more resources than borrowers, which may give them an edge in the litigation. As a result, many student loan borrowers fail to prove undue hardship, and many others don’t even try.

The new bankruptcy reform bill would make a simple, but far-reaching, change to the bankruptcy code by simply eliminating the different treatment of student debt in bankruptcy. Supporters of the bill argue that these measures are necessary in light of the financial ruin many American families face as a result of the pandemic and associated recession.

“We need to ease the burden on families facing the health and financial fallout from this pandemic. Said Senator Sheldon Whitehouse, one of the bill’s main co-sponsors. “Our employment-based health insurance system is ill-suited to a pandemic. Many of the millions of unemployed Americans have lost their health insurance as well as their income, and they are at increased risk of racking up huge medical bills if they contract COVID-19. “

“This public health crisis is pushing families to the brink, especially those whose hospital bills are piling up,” said Senator Elizabeth Warren, another senior co-sponsor. “Now more than ever, we must reform our bankruptcy system to help struggling individuals and families regain their financial health.”

Democratic senators have proposed similar bills in the past, but the proposals have gone nowhere in the Republican-controlled Senate. Now, with Democrats holding narrow majorities in both houses of Congress, this bill has a better chance of passing, but it is not clear whether it would garner sufficient bipartisan support to overcome a Republican obstruction.

Further reading

3 reasons Biden ruled out student loan relief from Stimulus – and what it means for borrowers

Biden’s stimulus proposal: no forgiveness for the student loan

6 student loan reforms that are possible with a democratic Senate

Biden names Betsy DeVos replacement – student loan borrower pushes for cautious optimism

Ayanna Pressley: Biden should write off $ 50,000 in student loan debt for every borrower

Could your student loans be canceled by Biden? It is complicated

Comments are closed.