fresh start through bankruptcy student loan reform / Fresh Start through Bankruptcy Act 2021, S2598

The Fresh Start Through Bankruptcy Act of 2021 is key student loan reform which could help burdened borrowers eliminate their school debt. This Senate bill, assigned bill number S2598, would discharge student loan debt regardless of whether it’s been an undue hardship or not, which in recent years has been a difficult hurdle to overcome.  The bill’s details are still being worked out. Presumably, when someone files either a Chapter 7 bankruptcy or Chapter 13 bankruptcy, at the end of it, they can discharge all of their student loan debt.

Fresh Start Bill Text

In August 2021, there is still one version of this bill. The original S2598 bill text has a couple of main provisions.  One of them provides for reimbursement from the university to the federal government if a lot of their students are having to file bankruptcy. Presumably, the rationale is to penalize educational institutions that have a high percentage of graduates who aren’t financially stable.

The Fresh Start through Bankruptcy Act of 2021 bill text we’re going to focus on is that surrounding dischargability, and amendments to 11 U.S.C. 523(a)(8).

Section 523(a) of title 11, United States code, is amended by striking paragraph (8) and inserting the following:

“(8) for an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship, or stipend received from a governmental unit or nonprofit institution, unless—

“(A) excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents; or

Student Loans: Now Almost Impossible to Discharge

Current State of Student Loan Forgiveness in Bankruptcy

Student loan bankruptcy reform may happen with the Fresh Start Through Bankruptcy Act of 2021, assigned S2598. For many people, student loan forgiveness is a distant dream, as bankruptcy makes student loans all but impossible to remove. In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act.

This bankruptcy reform, among other things, added a means test so fewer people would qualify for Chapter 7 bankruptcy. But BAPCPA also made even more student loans ineligible for bankruptcy discharge, absent proof of “undue hardship.” Regardless if a student loan was a private loans, for-profit, federally guaranteed or something else, undue hardship had to be shown.

Undue Hardship

First, a quick look back at “undue hardship” as it’s been interpreted by the courts, which has been pretty strict.

  1. debtor have to demonstrate they cannot maintain a minimal standard of living if they had to repay the student loans, based upon their current household budget
  2. additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and
  3. good faith effort to repay the loans by the debtor

Pretty much every person filing a Chapter 7 bankruptcy satisfies the first prong. If they’re filing bankruptcy, they barely have any money to pay their household expenses, let alone other debts like student loans. Good faith should be present in most student loan cases.

But “additional circumstances” are much harder to show, especially that these circumstances will continue for a longterm period of time. For the most part, it’s been near-impossible to show undue hardship, based upon the factors courts have been following.

What's Next for S2598

Next Steps for S2598, the Fresh Start bill and Student Loan Reform

The Fresh Start bill isn’t law yet, and is just starting its journey. It’s been referred to committee, and if it can make it out of the Senate Judiciary Committee, it would then be voted on by the entire Senate. If it passes there, it would go to the House of Representatives, possibly facing some reconciliation and compromise or amendments. Assuming the bankruptcy student loan reform passes the House, it’s a safe assumption that the president should sign it.

Return to this page for updates over the next few months as we track this important landmark legislation.

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