‘Undue hardship’ too strict a standard to cancel student loans in bankruptcy, says ABA
Annual meeting
‘Undue hardship’ too strict a standard to cancel student loans in bankruptcy, says ABA
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The House of Delegates passed a resolution at the ABA’s annual hybrid meeting on Tuesday, urging Congress to amend the U.S. Bankruptcy Code to allow borrowers to pay off their student loans without proving that the repayment of debt places “undue hardship†on them or their dependents.
By introducing Resolution 512Maryland State Bar Association delegate Christopher Jennison and Young Lawyers Division Assembly speaker said “student debt is a real and current crisis.”
He pointed out that the Young Lawyers Division presented a previous resolution at the February mid-year meeting that urges Congress and the executive branch to develop and implement programs to help law students and graduates who are experiencing financial difficulties due to their loan obligations. He told the House, which approved the resolution, to consider the move as the next logical step.
“While there are other policy solutions to tackle the underlying cause of high student debt and the high cost of legal education, it is imperative to create a lifeline” for lawyers who now face insurmountable student loan debt, Jennison said.
In 2019, more than 44 million borrowers owed more than $ 1.5 trillion in student loans, according to Federal Reserve data cited in the report accompanying the resolution. It was the second highest category of consumer debt, behind only mortgages.
Student loans were treated differently from other dischargeable debt after Congress passed the Education Amendments Act 1976, which prohibited borrowers from paying off these types of loans in bankruptcy for the first five years. years of their repayment, unless they can establish undue hardship.
The Student Loan Default Prevention Initiative Act 1990 extended the student loan discharge exception to seven years, and the Higher Education Amendments Act 1998 amended the bankruptcy code so that federally guaranteed student loans cannot be canceled at all unless the borrower can prove undue hardship.
The interpretation of what constitutes undue hardship rests with federal courts, which disagree on what borrowers must do to prove they meet that threshold, says the report accompanying the resolution. In addition to other factors, most courts have said that borrowers must prove that they cannot maintain a minimum standard of living for themselves or their dependents if they repay their student loans.
Also supporting the resolution, Aaron Sohaski, director of student debt and financial well-being for the young lawyers’ division, said that while it is not impossible to pay off student debt in the event of bankruptcy, the process imposes an unnecessary challenge on lawyers with large amounts. of debt.
“Like anyone faced with a personal decision to file for bankruptcy, lawyers choose this option as a last resort and the undue hardship threshold makes this task even more difficult,†said Sohaski. “Many student borrowers recognize that they won’t be able to be successful and, therefore, they won’t even try. “
Several lawmakers have sought to address this issue in recent years. Senator Dick Durbin, a Democrat from Illinois, and Representative Jerrold Nadler, a Democrat from New York, introduced the Student Borrower Bankruptcy Relief Act of 2019. Representative John Katko, a Republican from New York, introduced the Discharge Student Loans in Bankruptcy. Act of 2019. However, both have not been adopted.
In early August, Durbin and Republican Senator John Cornyn of Texas introduced the Fresh Start Through Bankruptcy Act of 2021. The bipartisan bill would allow the cancellation of federal student loans without undue hardship once borrowers have been repaid for at least 10 years. years.
Resolution 512 was co-sponsored by the Young Lawyers Division, the Law Students Division and the Paralegal Standing Committee. They proposed an earlier version at the mid-year meeting in February but withdrew it from consideration.
Follow ABA Journal’s coverage of the ABA Hybrid Annual Meeting 2021 here.