Philly Congresswoman Mary Gay Scanlon (D., PA) will be introducing a bill that allows for Covid-19 to be an argument for undue hardship on student loan borrowers. In bankruptcy court, there are many restrictions on student loan debt relief. Although it is very possible to receive a partial or even full discharge of student loan debt, it can be a long and difficult process. The Brenner Test is one of the standards used to judge if a debtor qualifies for student loan forgiveness.
From a bankruptcy attorney’s prospective, this bill completely misses the heart of the issue behind student loan debt forgiveness. Her bill would amend Chapter 11 bankruptcy code to include student loans as a dischargeable debt. Normally, Chapter 11 bankruptcies are most commonly used for business, specifically large corporations like JCPenny, PSEG, or ToysRUs, for the purpose of restructuring their business. Chapter 11 is a sophisticated bankruptcy chapter that is most utilized to have the federal bankruptcy court restructure the debt of a business with high grossing profits and assets. To put an individual, or even a small business owner, in the same arena as national corporations, it is too complicated and overwhelming to achieve any sort of relief to debtors.
As reported by the Philadelphia Inquirer, Scanlon stated about her bill “Why are we providing protections to banks and servicers of student loans? Given where we’re at now, it has to change. The intent [of the bill] is to create bankruptcy relief to Americans already struggling with debt who are affected during this immediate crisis.”
If Congresswoman Scanlon wants to create more protections for debtors against banks and servicers than she can either:
- 1) Work on legislation that attacks predatory lending that creates high interest rates, corrupt collection practices, and undue hardship upon borrowers. Programs like the public service forgiveness program are proven to fail while still gaining millions of federal funding to mislead borrowers. Funding programs that not only fail, but mislead borrowers towards improper repayment options, or denial of applications that are acceptable, is not creating any protections to borrowers.
- 2) Amend the bankruptcy code in Chapter 7 or Chapter 13, where most individuals or small businesses can file for bankruptcy for a removal or repayment of their debt. The same powers bankruptcy has to strip away debt from mortgages can be utilized to strip away debt from student loans.
Chapter 11 is also the most expensive chapter to file in since the filing fee is $1071. Any debtor who enters Chapter 11 bankruptcy will also have to pay attorneys fees, most of which would require a base retainer of $5000 – $10,000, all of which is just to begin their case. In all other
federal courts from immigration court to family court to bankruptcy court, the filing fee for Chapter 11 is one of the highest.
Therefore, attempting legislation that would allow for student loans to be discharged in this chapter is only forcing debtors to move into an arena much too sophisticated for their case. Democrats have attempted to include student loan debt relief in their Covid-10 relief packages from the CARES Act to the drafting of the HEROES Act; yet none were successful. It is unclear until the bill is introduced what kind of change Scanlon hopes to accomplish for debtors if the bill were to pass. Nevertheless, legislation needs to push more to make student loan debt a dischargeable debt in bankruptcy rather than lessening the way students can seek relief.