Today, Senators Elizabeth Warren (D-MA), Dick Durbin (D-IL) and Sheldon Whitehouse (D-RI), along with several House Democrats, presented the Consumer Bankruptcy Reform Act, 2020. This is the first major consumer bankruptcy reform law to be introduced to Congress since the Bankruptcy Abuse Prevention and Consumer Protection Act 2005. If passed, the bill would fundamentally change the entire bankruptcy system, in particular student loan borrowers.

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 only applied to federal student loans, but were later extended to cover private student loans following the adoption 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 brought 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 much 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 removing the section of the code that exempts student debt from discharge. If adopted, student loans would not be treated any differently from other forms of consumer debt and could be discharged without adversarial proceedings and without having to prove “undue hardship”.

Among other things, the bill would also radically reform the bankruptcy system by replacing Chapter 7 and Chapter 13 bankruptcies with a single, unified bankruptcy process. This would create a uniform federal exemption for family properties, rather than a patchwork of state exemptions. It would allow the payment of certain government fees and fines. It would exempt sources of income and assets related to alimony, child support, the child tax credit and the earned income tax credit. And it would crack down on the predatory practices of lenders and creditors.

“Our Consumer Bankruptcy Reform Act simplifies and modernizes the consumer bankruptcy system to help those in debt – starting by creating a single system for all consumers, streamlining the filing process and reducing filing fees. Said Senator Warren. “I have sat in bankruptcy courtrooms and heard the stories of people who worked hard, had big dreams and whose lives had taken a terrible turn. Bankruptcy is supposed to be a last resort to help people get back on their feet. We need to fix the bankruptcy to give people a fighting chance. “

The bill has little chance of being passed by the Republican-controlled Senate during the Lame Ducks session. But his odds could improve depending on the outcome of Georgia’s January runoff election, which will determine which party controls the Senate after Joe Biden takes over the presidency on January 20.

Further reading

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DeVos Extends Student Loan Relief Until 2021: What You Need To Know

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New stimulus bill could extend student loan relief and unemployment benefits – but does not include any cash payments

Could Biden write off some student debt with executive action?

What the election results mean for student loan borrowers