Proposed Bill Would Make Discharging Student Loans in Bankruptcy Easier
Americans are carrying a staggering $1.7 trillion in student loan debt. Before the COVID-19 pandemic hit and a moratorium was placed on payments, 11 percent of student loans were 90 days or more past due or in default. With the economy still in turmoil, many experts expect defaults to increase when the moratorium ends this fall. As President Biden mulls a possible executive order granting relief, a legislative solution is also in play.
A group of U.S. senators have introduced a bill, known as the Medical Bankruptcy Fairness Act of 2021, that would greatly expand the number of people eligible for a discharge of student loans in bankruptcy.
Proving undue hardship
Most people think of bankruptcy as a means of getting rid of debt and getting a fresh start. But under current law, you can discharge student loans in bankruptcy only if you can prove undue hardship. That means showing all of the following are true:
- You could not maintain a minimal standard of living for yourself and your dependents if required to repay the loan(s).
- Your current financial situation is likely to continue for all or most of the repayment period.
- You have made a good faith effort to repay the loan(s).
Meeting this three-part test is quite difficult. As a result, bankruptcy often does not provide the relief that student loan borrowers need.
The proposed law would allow anyone who lost their job or saw a reduction in their income or work hours due to the pandemic to qualify as a “medically distressed debtor.” You would not in fact have to be burdened by excessive medical bills to meet this definition. Essentially, anyone who experienced economic harm due to COVID-19 could be deemed medically distressed and as a result could discharge student debt without proving undue hardship. In other words, if you qualify, your student debt could be treated the same as credit card debt and be wiped away in Chapter 7 bankruptcy.
The relief would be of limited duration. To qualify, you would need to file bankruptcy by March 13, 2023, three years from the date on which the U.S. declared a national emergency due to COVID-19.
As a bankruptcy attorney with over 30 years of experience at the law office of Mark E. Cohen, Esq., I focus on helping New Yorkers get relief from overwhelming debt through the bankruptcy process, including student loans. I am monitoring the progress of the proposed legislation and will be ready to help you discharge your student debt if it becomes law. Call my Queens office at 718-487-9979 or contact me online to schedule a free consultation.