On August 4, 2021, Senator Richard Durbin (Democrat-Illinois) introduced Senate Bill 2598 entitled the FRESH START Through Bankruptcy Act. The bill was co-sponsored by Senator John Cornyn (Republican-Texas). Through the last several years, it has been rare that a bill involving student loans has received support jointly from a Republican and Democrat.
The purpose of Senate Bill 2598 is to amend the bankruptcy code and modify the treatment of student loans in bankruptcy. Currently, the bankruptcy code allows student loans to be discharged if the student is under an undue hardship. The term undue hardship is not defined in the bankruptcy code. However, many courts have followed the decision of Brunner v. New York State Higher Education Services Corporation, which establishes a three-part test defining undue hardship. Other courts have used the totality of circumstances test. Both the Brunner and the totality of circumstances tests have a very difficult standard to discharge student loans.
The purpose of Senate Bill 2598 is to amend the bankruptcy code and modify the treatment of student loans in bankruptcy. Currently, the bankruptcy code allows student loans to be discharged if the student is under an undue hardship. The term undue hardship is not defined in the bankruptcy code. However, many courts have followed the decision of Brunner v. New York State Higher Education Services Corporation, which establishes a three-part test defining undue hardship. Other courts have used the totality of circumstances test. Both the Brunner and the totality of circumstances tests have a very difficult standard to discharge student loans.
One of the provisions in Senate Bill 2598 allows student loan debt to be discharged over the passage of time. The specific language in the bill reads that a student loan can be discharged when “the first payment on such debt became due before the 10-year period (exclusive of any applicable suspension of the repayment period) ending on the date of the filing of the petition.” Therefore, if the student loan has been in repayment for ten years without any forbearances, the loan can be discharged without the necessity of proving an undue hardship. Prior bankruptcy laws provided the discharge of student loans when the loan was five or seven years old, but these statutes were later amended.
Another major provision in Senate Bill 2598 is to hold schools accountable for defaulted loans. The bill provides that the “covered institution” shall pay up to 50% of the discharged student loan to the Department of Education. The specific amount will depend on factors like the percent of students that are defaulting on their loans after attending an institution.
Senate Bill 2598 has been referred to the Senate Judiciary Committee. We will keep our clients up-to-date on the developments of this bill and any others affecting student loans. If you have further questions, feel free to contact me at any time.
This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.
