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The Fresh Start Through Bankruptcy Act of 2021
2022 Update: The Fresh Start Through Bankruptcy Act is still in committee, and hasn’t been put to a vote by the Senate yet.
What is the Fresh Start Through Bankruptcy Act of 2021?
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
“(B) the first payment on such debt became due before the 10-year period (exclusive of any applicable suspension of the repayment period) ending on the date of the filing of the petition;
“(8A) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—
“(A) an obligation to repay funds received as an educational benefit, scholarship, or stipend, other than an obligation described in paragraph (8); or
“(B) any educational loan, other than a loan described in paragraph (8), that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;”.
Understanding S2598, the Fresh Start Through Bankruptcy Act
Key Interpretation of the Fresh Start Bill
This student loan bankruptcy reform 2021 bill has two key conditions or requirements. First, to get student loan forgiveness, the new 523(a)(8)(B) requires that the first payment on the student loan was at least 10 years prior to the filing of the petition. This means someone who graduated 4 years ago and is struggling to pay their student loans would still have to prove undue hardship on the debtor and their dependents.
However, the good news is it doesn’t mean that someone whose student loans were first due 15 years ago but are only in default for 6 years needs to wait 4 more years of default. If the first payment was over 10 years ago, things are looking good.
Exception: Exclusive of Suspension of the Repayment Period
There’s a saying: “what the large print giveth, the small print taketh away.” This can apply here to Section B. Note the parenthetical “exclusive of any applicable suspension of the repayment period.” What does that mean? It probably means that if the student loan borrower got and received a student loan deferment or student loan forbearance, that tolls the ten years of the statute, or “stops the clock.” The repayment period was suspended.
Example: So, let’s say someone got student loans 15 years ago, the first payment was 11 years ago, but two of those repayment years were in deferment or forbearance before the bankruptcy was filed, it’s only been 9 years of repayment. Therefore, the student loans forgiveness would not apply in the bankruptcy. In this example, the student loan borrower would have to wait another year so that there’s been ten years of repayment time, then file the bankruptcy.
The key lesson here, then, is to review the repayment history of the student loan. This will help learn when the first payment was due, and about any deferments or breaks in that repayment period, if any.
Means Test and Fresh Start Bill Student Loans
What about the means test and Fresh Start student loans? There’s nothing explicit in the S2598 bill text about the means test or lowering the bar to qualify for Chapter 7. There is nothing to indicate that it’s the intent of Congress or legislative intent to eliminate the means test of “current monthly income” eligibility for Chapter 7.
Therefore, if someone qualifies for Chapter 7 bankruptcy, and satisfies the criteria of this student loan bankruptcy reform, then all qualifying debt would be discharged. Alternatively, if someone doesn’t qualify for Chapter 7 and their student loans fit the Fresh Start Through Bankruptcy Act criteria, once they pay a set number of payments in Chapter 13 bankruptcy, at the end, all eligible debt would be discharged, including all the unpaid student loans.
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.
- 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
- additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and
- 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.
The Fresh Start Through Bankruptcy Act of 2021
2022 Update: The Fresh Start Through Bankruptcy Act is still in committee, and hasn’t been put to a vote by the Senate yet.
What is the Fresh Start Through Bankruptcy Act of 2021?
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
“(B) the first payment on such debt became due before the 10-year period (exclusive of any applicable suspension of the repayment period) ending on the date of the filing of the petition;
“(8A) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—
“(A) an obligation to repay funds received as an educational benefit, scholarship, or stipend, other than an obligation described in paragraph (8); or
“(B) any educational loan, other than a loan described in paragraph (8), that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;”.
Understanding S2598, the Fresh Start Through Bankruptcy Act
Key Interpretation of the Fresh Start Bill
This student loan bankruptcy reform 2021 bill has two key conditions or requirements. First, to get student loan forgiveness, the new 523(a)(8)(B) requires that the first payment on the student loan was at least 10 years prior to the filing of the petition. This means someone who graduated 4 years ago and is struggling to pay their student loans would still have to prove undue hardship on the debtor and their dependents.
However, the good news is it doesn’t mean that someone whose student loans were first due 15 years ago but are only in default for 6 years needs to wait 4 more years of default. If the first payment was over 10 years ago, things are looking good.
Exception: Exclusive of Suspension of the Repayment Period
There’s a saying: “what the large print giveth, the small print taketh away.” This can apply here to Section B. Note the parenthetical “exclusive of any applicable suspension of the repayment period.” What does that mean? It probably means that if the student loan borrower got and received a student loan deferment or student loan forbearance, that tolls the ten years of the statute, or “stops the clock.” The repayment period was suspended.
Example: So, let’s say someone got student loans 15 years ago, the first payment was 11 years ago, but two of those repayment years were in deferment or forbearance before the bankruptcy was filed, it’s only been 9 years of repayment. Therefore, the student loans forgiveness would not apply in the bankruptcy. In this example, the student loan borrower would have to wait another year so that there’s been ten years of repayment time, then file the bankruptcy.
The key lesson here, then, is to review the repayment history of the student loan. This will help learn when the first payment was due, and about any deferments or breaks in that repayment period, if any.
Means Test and Fresh Start Bill Student Loans
What about the means test and Fresh Start student loans? There’s nothing explicit in the S2598 bill text about the means test or lowering the bar to qualify for Chapter 7. There is nothing to indicate that it’s the intent of Congress or legislative intent to eliminate the means test of “current monthly income” eligibility for Chapter 7.
Therefore, if someone qualifies for Chapter 7 bankruptcy, and satisfies the criteria of this student loan bankruptcy reform, then all qualifying debt would be discharged. Alternatively, if someone doesn’t qualify for Chapter 7 and their student loans fit the Fresh Start Through Bankruptcy Act criteria, once they pay a set number of payments in Chapter 13 bankruptcy, at the end, all eligible debt would be discharged, including all the unpaid student loans.
