Bankrupt student loan borrowers could finally take a break


Getting out of crushing student loan debt could become a little easier if the proposed new changes to bankruptcy rules take effect.

The proposed changes are part of a far-reaching report written by prominent members of the bankruptcy community, including former judges, academics and lawyers on both debtor and creditor sides.

The recommendations of the American Bankruptcy Institute’s Commission on Consumer Bankruptcy are aimed in part at addressing the issues that have made it more difficult for debtors to file for bankruptcy. The 274-page report, released on Wednesday, addressed issues such as attorney fees, rainy day funds for debtors with unforeseen expenses and the disproportionate number of African-American consumers in some type of litigation proceeding. bankruptcy.

Typically, bankruptcies aim to consolidate a debtor’s finances while paying off creditors under judicial supervision. One of the options is a Chapter 7 petition, where the assets are sold, the proceeds go to the creditor, and the debts are discharged. Another option is the Chapter 13 cases, which organize installment payment plans.

In 2018, bankruptcy claims hit their lowest level since 2007 after a peak linked to the Great Recession. Rates fell as the 10-year bull market continued and unemployment hit a 49-year low.

But some observers said there were other problems explaining the low numbers – one being that some people, already in the red, couldn’t afford to file for bankruptcy because of legal fees and costs. justice were too high. The report presents several options on how to solve the payment problem.

Another major hurdle for consumers making a fresh start in bankruptcy is their student loan debt, which is notoriously difficult to pay off in the process.

The bankruptcy code has not been updated since 2005

The Bankruptcy Code was enacted in 1978. Its last major update was in 2005. Much has changed even since 2005, according to the report. One example was that Americans’ total student debt burden was so low in 2005 that it didn’t even appear in the Federal Reserve’s monthly consumer debt reports.

It was then. Today Americans owe $ 1.5 trillion in student loans.

“The debt that hangs over the debtor forever comes at a cost. “

– – Elizabeth Perris, retired bankruptcy judge, co-chair of the Commission on Consumer Bankruptcy of the American Bankruptcy Institute

“The debts that weigh on the debtor forever have a cost,” said Elizabeth Perris, a retired bankruptcy judge who co-chaired the commission’s report Thursday. “It’s a cost in terms of not buying houses, cars, having children and we just recognize that at some point for people who want to go bankrupt, they should be able to to make a fresh start and move on. with their life.

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The proposals presented by the commissioners serve a variety of purposes. The first is to provide recommendations to lawmakers if they ever wish to reform the bankruptcy code, said Dalié Jiménez, one of the commissioners and professor at the University of California-Irvine School of Law.

Some of the most dramatic suggested changes to the treatment of student loans fall into this category, including a proposal that would allow borrowers to pay off student loans in bankruptcy seven years after they become due.

“I’m not sure Congress would go that far,” said Jiménez, who was on the founding staff of the Consumer Financial Protection Bureau. Either way, she said she was happy to see the body, which included members of the bankruptcy community from different sides, including creditors’ lawyers, embrace the idea that some of these loans should. be canceled after a period.

Hope for borrowers who want to pay off their debt in bankruptcy

Borrowers should be allowed to pay off their student loan debts from private lenders, the report recommends.

The report also reiterated a proposed bankruptcy code amendment that has become more popular in recent years – allowing borrowers to pay off private student loan debt in the event of bankruptcy.

But even if Congress does not decide to act on these proposals anytime soon, the report’s suggestions could give borrowers hope. This is because he offers suggestions on how judges might interpret the current bankruptcy code in a way that could help troubled borrowers seeking release from their student loans.

Many judges are already looking for a way to treat distressed borrowers more leniently in bankruptcy, Jiménez said. “They need cases in front of them to do it and they need argumentative arguments,” she said. The report is “more likely to advance the needle than one of them who puts his neck out without much support.”

Change the definition of “undue hardship”

Currently, borrowers can only be discharged from their student loans in bankruptcy if it is clear that paying down the debt would impose “undue hardship” on them. In most parts of the country, the standard of what constitutes “undue hardship,” known as the Brunner test, is notoriously high. The report encourages judges to review this standard.

The Brunner Test, as currently interpreted by most jurisdictions that use it, requires borrowers to prove that they cannot maintain a minimum standard of living if they are forced to repay their loans, that their This situation is likely to persist, making it difficult for them to repay the loans in the future – a so-called “certainty of desperation” – and that they have made a good faith effort to repay them.

Instead, the report recommends that judges assess whether the borrower could reasonably repay the debt within the contractual term of the loan – typically 10 years – and whether that would prevent him from meeting basic expenses, rather than plunging him into the debt. poverty.

“This report offers more support for that, taking a fresh look at those two words – literally two words – undue hardship, and how they are to be interpreted.”

– – John Rao, lawyer at the National Consumer Law Center on the critical phrase “undue hardship”.

“There are already courts that are looking at the Brunner test differently than they might be 15 years ago,” said John Rao, an attorney at the National Consumer Law Center and another of the commissioners. This is largely because student debt has become a more pervasive and arduous burden than it was when the Brunner test was developed in the 1980s. “This report offers more support for that, throwing in a fresh take on those two words – literally two words – undue hardship, and how they are to be interpreted. “

Suggestions for the Ministry of Education

In addition to providing food for judges, the report also provides suggestions on how the Department of Education should handle student loan bankruptcy cases. Last year, the agency asked for comment on when it should fight borrowers’ petitions to have their federal student loans discharged in bankruptcy.

The commission’s report suggests that the ministry has established clear guidelines that the agency and the companies it works with under the federal student loan program will not oppose a student loan borrower’s efforts to that its loans be canceled in the event of bankruptcy if the borrower is eligible for social security. or Veterans Affairs disability benefits or falls below certain poverty lines.

The education ministry “should just give up in situations that seem pretty terrible,” Jiménez said. “It’s not worth it, it’s really squeezing blood out of a stone at this point.”


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