In recent years, student loan debt has topped $1.6 trillion, making it the largest of consumer debt. Common issues with student loan collection agencies consist of aggressive and abusive collection tactics and failure to accurately inform borrowers of their rights. Currently, bankruptcy laws make it difficult to discharge student debt. However , for most people bankruptcy is simply not an option if you can’t afford legal fees, or you’ve recently had a bankruptcy discharge already in Chapter 7s. According to SSRN, “only 0.1 percent of debtors who have filed for bankruptcy try to discharge their student loans, and 40% succeed”. This means debtors receive either full or partial discharge of their student loans, and proves that student loan discharge is possible depending on the circumstance.
On July 16, 2020, Congresswoman Mary Gay Scanlon introduced a bill call COVID-19 Student Loan Relief Act (CSLRA) of 2020. The bill is expected to expand 11 USC 523 (a)(8) to allow those impacted by Covid-19 to discharge their federal and private student loan debt if their income has dropped by 20% or more due to the pandemic and temporarily set interest rates to 0 percent, but only if the primary income-earner of the debtors family died or became seriously disabled during Covid-19.
“We have an obligation to protect students and the Justice for Student Borrowers Act restores legal rights to students that are often taken advantage of,” Rep. Scanlon said in her House of Representatives blog. This way debtors can get a student loan debt discharge while filing bankruptcy, making it one track and easier than having multiple hearings for both. This bill is expected to begin January 21, 2020, and extend until 60 days after the duration of the Covid-19 emergency. This relief will help many students and parents retain financial stability but keep a majority of the 44 million debtors unwilling.
According to 11 USC 523 (a)(8), qualified student loans will not be discharged unless the debtor shows that they are under “undue hardship”, meaning they have a reason to fully or partially exempt payment due to financial difficulty. Debtors can often take advantage of federal programs to delay the payment process to their creditors, this being the reason there are many restrictions on student loan debt relief. Borrowers need proof of good-faith in attempting to repay their loans. The “Brunner Test” helps to determine if you can get a discharge for student loans in bankruptcy, Rep. Scanlon’s bill seeks to make this process easier.
“With the grants introduced in this bill comes a series of qualifications that would possibly exclude 25 million student loan borrowers,” according to Forbes. The bill will exclude every borrower that doesn’t meet the requirements, leaving the majority of borrowers with a hefty debt. With more than half of the borrowers excluded and an income impacted by more than 20% to 40%, who can afford the proper representation to get them a discharge of debt? According to the Bill, the exemptions are
“At least 20 percent, and the prior income of the debtor was less than $75,000 per year;
at least 30 percent, and the prior income of the debtor was between $75,000 and $125,000; or
at least 40 percent, and the prior income of the debtor was not less than $125,000”, This is only during the duration of the COVID-19 outbreak or as a result of it, yet it is a much needed provision made to aid debtor’s through this pandemic.
Image by Prachatai via Flickr