A new bill tries to facilitate that process.
House Judiciary Committee Chairman Jerry Nadler (D-NY) and Sen. Elizabeth Warren (D-MA) delivered the ‘Consumer Bankruptcy Reform Act of 2020, ‘which proposes to replace the current systems of Chapter 7 and Chapter 13 personal bankruptcy with one system, Chapter 10, in addition to specifically addressing the suitability of student loans for bankruptcy discharge.
“The bankruptcy system is broken … it needs to be fixed,” said Christine Kingston, a California-based attorney at Surf City Lawyers, when asked about the proposed changes to the bill regarding student loan borrowers. Kingston, who litigates student loan bankruptcy cases, noted that an American can “free himself from their legal obligations” through bankruptcy after “going to Vegas and gambling his rent and mortgage” but “when they want to improve themselves and. want to take a course … then they better fly well and do it accurately … don’t borrow too much. “
The legislation, co-sponsored by Sens. Dick Durbin (D-IL), Sheldon Whitehouse (D-RI), and David N. Cicillin (D-RI), proposes to amend Title 11 of the U.S. Bankruptcy Act with a Chapter 10, that, among other things, would make student loans – private and federal – eligible for discharge by bankruptcy.
The bill aims to put student loan debt on “terms equivalent to most other types of debt,” such as credit card debt, Warren said in a statement, and “to make it easier and cheaper for families and individuals with financial disabilities. meaningful bankruptcies and give Americans a better chance of getting back on their feet. ”
Senator Whitehouse added that he was “proud to support this sensible bill to enable Americans in financial difficulties to free themselves from student loans and medical debt.”
‘These people are facing a life sentence ‘
On December 1, Warren pressed Federal Reserve Chairman Jerome Powell on whether student loans were a drag on the US economy.
Powell replied that he “has been singled out because he cannot be pardoned in insolvency.”
President-elect Biden also has supported relaxation of standards that allows student debtors to cancel – or dismiss the legal term – student loans in bankruptcy.
Austin Smith, a DC attorney at Smith Law Group who represents several student debtors in their bankruptcy lawsuit, told Yahoo Finance that this bill has serious implications for borrowers. According to Smith’s estimates, if this bill passes, $ 3 billion in private student loans that have already gone through bankruptcy will be eligible for cancellation.
In some of his cases, borrowers saw their student loans forfeited through a court order, but lenders disagreed with the verdict and continued to collect. These loans would be cleared from the account.
An increasing number of student debtors predominate after student loan submission bankruptcy filingsbecause they saw their private and federal debt either forgiven or written off.
Kingston noted that one of her clients who attended one of the now-defunct art institutions went through the bankruptcy process rather than the borrower defense process (which has its own problems) and saw their private student loan with Navient written off from $ 250,000 to $ 10,000 at an interest rate of 1%.
“These people are facing a life sentence,” Kingston told Yahoo Finance.
More generally, “there is a growing realization among bankruptcy court judges that current standards are far too strict,” Mark Kantrowitz, a student loan expert, told Yahoo Finance. Why should student loans be treated in the same way as child support or taxes and not as credit card debt? There is no real difference between student loans and credit card debt. They are both commercial loans that are unsecured. “
Student loan servicers love the current system
There will no doubt be significant backlash from lenders who would rather make the process inaccessible to borrowers. But experts see an opportunity to positively reform the system.
A recent article by Jason Iuliano, an expert on student loans and bankruptcy, found that servicers often urge borrowers to accept settlements – instead of letting the process go through – to avoid setting precedents that other student borrowers who declare bankruptcy could to follow.
There is also this argument that because these loans are considered untouchable in bankruptcy, it allows lenders to offer better rates to borrowers because they are protected from being erased.
But “the argument that excluding student loans from discharge allows private lenders to make these loans in order to offer them cheaper loans simply does not hold,” Kantrowitz said.
Based on a paper from 2007 By Kantrowitz, if Congress were to ease the process and bankrupt more private student loan borrowers, “this is unlikely to result in a significant decrease in the availability of private student loans to potential borrowers with low credit scores.”
Aarthi is a reporter for Yahoo Finance. She can be reached at email@example.com. Follow her on Twitter @arthiswami.