Not all debt can be discharged at the end of bankruptcy. Whether you are going through a chapter 7 liquidation or a chapter 13 reorganization where you come up with a plan to pay off as much debt as possible over 3 to 5 years. The unpaid portion of the debt that is not repaid through the chapter 13 reorganization will be discharged once you complete the 3 or 5-year repayment plan, which means that you will not have to pay it back.
Types of debt that cannot be discharged include certain back taxes, taxes paid using a credit card, anything determined to be a domestic support obligation such as child or spousal support, and student loan debt.
The Bipartisan Effort is a Reaction to the Call for Student Debt Forgiveness
Well, student loan debt might soon be removed from this list. There has been a lot of talk about student loan forgiveness. After President Biden took office in January, a large contingent of congressmen from the President's party started to call on President Biden to forgive all or a portion of the debt relating to student loans.
President Biden has so far resisted the calls to forgive student loans. Debt forgiveness does not have widespread support on the left, and it is a very unpopular option across the aisle. However, even though debt-forgiveness is not a popular option, it does not mean that student loan debt is not a serious issue.
Fresh Start Through Bankruptcy Act
One alternative is a new bipartisan bankruptcy reform bill introduced by Senator and Senate Majority Whip Dick Durbin (D-Illinois) and Senator John Cornyn (R-Texas). The bill, called the Fresh Start Through Bankruptcy Act, would amend the federal bankruptcy code to permit student loan debt to be discharged under certain circumstances more easily.
The current law does not specifically disallow the discharge of student loan debt, but it is extremely difficult to achieve due to the law's wording. The current law states that borrowers must have an "undue hardship." The issue is that "undue hardship" is not defined anywhere in the law. Since there is no definition, the courts have created a test for "undue hardship," which varies between jurisdictions. In some jurisdictions, the test is that the borrower must prove "certainty of hopelessness," which is also a term that lacks definition, so it is practically impossible to prove.
Another difficulty of discharging student loan debt is that it is currently an adversarial process, meaning the borrower must directly sue the lender, which leads to a long, drawn-out, and expensive process.
A Return to the Previous Standard of a 10-Year Waiting Period Before Eligibility
The new bill under consideration would allow student loan debt to be discharged without meeting an undefined threshold and avoiding further adversarial and expensive court cases.
The current bill would go back to the old standard of requiring a borrower to repay the loan for at least ten years before the debt is eligible for discharge. This waiting period was the law regarding student loan debt before the change requiring proof of undue hardship.
Returning to the ten-year waiting period is seen as an acceptable compromise and alternative to the call to forgive debt across the board.
The Fresh Start Through Bankruptcy Act was just introduced on August 3rd and could take some time to go through the process of being voted upon, sent to the House of Representatives, then to the President for his signature. We will be keeping a close eye on this bill as it works its way through the process.