A new bill being presented to Congress will permit the discharge of student loans in bankruptcy provided certain conditions are met. The bill, sponsored by Senator Richard Durbin and Senator John Cornyn, is titled the Fresh Start In Bankruptcy Act.
Under the current bankruptcy laws, it is quite difficult to discharge a student loan in bankruptcy. Generally, the debtor must bring an adversary proceeding and obtain a finding from a bankruptcy judge that the student loan constitutes an undue hardship. The undue hardship standard is very difficult to meet. Furthermore, an adversary proceeding is essentially a lawsuit, separate from a bankruptcy filing, whereon the debtor is in active and often spirited litigation against the lender. An adversary proceeding, due to its complexity, often requires the retention of an experienced attorney, and commensurate attorney fees.
Among the provisions advanced in the bill is to permit the discharge of federal student loans that are more than 10 years from the date the first payment was due on the student loan or loans. Any loans that are less than ten years old would nevertheless be eligible for discharge under the undue hardship standard.
Another more salient portion of the proposed bill is that IHEs or institutes of higher education with more than 1/3 of their students receiving student loans will be mandated to refund to the government a portion of the student loan if such loan is subsequently discharged in bankruptcy. Such provision will be applicable to IHEs that have historically low repayment rates and high default rates by borrowers.
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