The United States Supreme Court dismissed an important student loan and bankruptcy-related case.
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The United States Supreme Court has refused to hear a case that raises the question of whether student loans can be processed in bankruptcy, imposing a strict bankruptcy standard on student loans for the time being.
The case of Conti v. Arrowood Indemnity Co. hit a borrower trying to pay off her private student loan in bankruptcy. Conti, the borrower, had attended the University of Michigan and taken out over $ 76,000 in private student loans from Citibank. The loan applications identified the debt as an educational debt for “students attending four-year colleges and universities,” and the promissory notes stated that “the proceeds of this loan should be used for certain educational expenses.” The loans were paid directly to the university and none of the payments exceeded the total cost of participation.
In 2017, Conti filed for bankruptcy and listed the Citibank loans as excusable. But bankruptcy law treats student loans very differently from most other forms of consumer debt, such as credit cards or overdue bills. In order to redeem student loans in bankruptcy, borrowers usually have to prove that they have “undue hardship”, which is a standard that is difficult to meet. These restrictions initially only applied to federal student loans, but were extended to private student loans (such as Conti’s) following the passage of a bankruptcy reform law in 2005.
The standard of “unreasonable hardship” is not precisely defined by law, so bankruptcy courts have introduced several tests, which vary by district, to determine whether a borrower can meet the standard. However, in order to even prove that they meet the “unreasonable hardship” standard, student loan borrowers must initiate “bankruptcy proceedings,” which are essentially insolvency proceedings brought against the respective lender. The adversarial process can be a lengthy and invasive process for borrowers and can become quite expensive for those who hire a private attorney. Student loan lenders may also have significantly more resources than borrowers, which can give them an edge. As a result, many student loan borrowers fail to demonstrate undue hardship and many others fail even to try.
However, Conti filed an adversarial procedure in order not to prove that it meets the “unreasonable hardship” standard for student loans. Instead, she filed a challenge to prove that the private student loans were not “qualified education loans” within the meaning of the bankruptcy code because of questions and disputes about the exact cost of participation, her student status and other applicable financial aid. In the event of success, this strategy could possibly have completely circumvented the standard of “unreasonable hardship”.
However, the bankruptcy court rejected their arguments, and a federal district court and the sixth district federal appeals court upheld it. The Sixth Circuit concluded that the simple wording of the loan application and promissory notes clearly showed that the loans were student loans and thus not deductible in bankruptcy without evidence of undue hardship.
Conti appealed to the US Supreme Court. But by rejecting the case today, the court has effectively maintained the bankruptcy law’s strict treatment of student loans.
Ultimately, when it comes to student loans and bankruptcies, Congress can take action to bring about real reform. Earlier this year, Senate Democrats unveiled the Medical Bankruptcy Fairness Act of 2021, which would allow student loan borrowers to pay their student debts in bankruptcy without having to demonstrate undue hardship. The bill would make a simple amendment to the bankruptcy law by simply removing the section that treats student loan debt differently.
Democrats in Congress have proposed similar bills in the past, but those proposals went nowhere in the Republican-controlled Senate. Now that the Democrats hold narrow majorities in both houses of Congress, bankruptcy reform has a better chance of getting passed. However, it is unclear whether student loan bankruptcy reform would find enough bipartisan support to overcome a potential Republican filibuster.
further reading
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Biden Administration Announces Comprehensive Overhaul of Income-Based Repayment and Allocation Programs for Student Loans
Will Biden cancel the student loan debt? Maybe we will know soon
Biden’s Student Loan Forgiveness Review: Should You Take Steps Now to Relieve Student Debt Later?
source https://collegeeducationnewsllc.com/supreme-court-rejects-student-loan-bankruptcy-case-leaving-harsh-standard-intact-for-now/
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