Why the Fresh Start Through Bankruptcy Act 2021?

August 18, 2021

Congress has proposed a new bill that will make student loan debts dischargeable after 10 years.  This bill is called the “Fresh Start Through Bankruptcy Act of 2021.”  This new bill has been much anticipated. The student loan crisis was frequently discussed during and after the last federal election.   The concept behind the bill also has some bi-partisan support.   The question is, “Why is this Fresh Start Act being proposed?”

Student Loans and the Current Bankruptcy Law

Fresh Start Through Bankruptcy Act 2021It is nearly impossible to discharge (eliminate) any form of student loan debt with the current bankruptcy code.   Essentially, all student loan debts are considered “non-dischargeable” in bankruptcy.   That means that student loans, whether private or government-backed, almost always remain after bankruptcy.

The decision to make eventually make all student loans non-dischargeable happened over the course of several Acts of Congress.  The first Act was in 1976, followed by even more encompassing Acts that were approved in 1979, 1984, 1990, 1998, and finally in 2005.   The end result was that ALL student loans could no longer be eliminated in bankruptcy.

The only exception was the “undue hardship discharge.”   In very unique cases, you can bring a lawsuit during bankruptcy against your student loan creditor.  In these cases, you can request a discharge of your student loan for “undue hardship.”   However, because Congress essentially said that “all student loans are non-dischargeable” in previous Acts, it has greatly limited hardship discharges.   In practice, many districts require you to be terminally ill, very elderly, or disabled to have any sort of chance of your lawsuit succeeding.

To make matters worse, the student loan lenders themselves will usually just “discharge” or forgive loans in extreme situations even without bankruptcy.  The lenders already know repayment is completely impossible in these situations.  Therefore, arguably, you get almost nothing at all within the current bankruptcy that allows any useful elimination of student loan debts.

Why Then The Fresh Start Through Bankruptcy Act of 2021?

The old law created a horrible loan crisis where countless student loans are now in default.   Entire multitudes of students received inferior education and were saddled with high student loan debts.  In fact, the old laws encouraged schools to prey against whoever wanted to attend.  There was no emphasis or goal to get good end results.   There was no motivation that ensured student loan borrowers would become successful after their education.

The new law attempts to bring accountability back to educators.   Under the new act, student loan borrowers will be able to discharge student loans 10 years after the date the first payment was due.   Then, each student loan that is discharged will require the educational facility to repay a certain percentage of any forgiven student loan amount.  This new law will bring relief for bad student loans.  It also brings more accountability to educational institutions that encourage the use of student loan financing.


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