Medical Bankruptcy Fairness Act

Sweeping Bill To Discharge Student Loan and Medical Debt In Bankruptcy

The current bankruptcy code treats student loan debt differently from most other forms of consumer debt, such as credit cards and medical bills. Borrowers must generally prove that they have an “undue hardship” in order to discharge their student loan debt in bankruptcy. These restrictions initially only applied to federal student loans, but were subsequently expanded to cover private student loans following the passage of a 2005 bankruptcy reform bill.

The “undue hardship” standard applied to student loan debt is not adequately defined in statute, so bankruptcy judges have established various tests (which vary by jurisdiction) to determine discharge eligibility.

In order to show that they meet this standard, borrowers must initiate an “adversary proceeding,” which is essentially a lawsuit within the bankruptcy case that is brought against the borrower’s student loan lenders. Through the adversary proceeding, the borrower must present evidence showing that they meet the undue hardship standard, while the student lenders present opposing evidence.

The adversary proceeding can be a long and invasive process for borrowers, and can get quite expensive for those who retain a private attorney. Student loan lenders may also have significantly more resources than borrowers, which can give them an edge in the litigation. As a result, many student loan borrowers are unsuccessful in proving undue hardship, and many others don’t even try.

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Status

Pending legislation

Source

Medical Bankruptcy Fairness Act of 2021

Effective timeline

Pending

American workers and individuals would find much financial relief if this bill is enacted, there is still much to deliberate in congress over how this bill will effect financial institutions with regard to outstanding debts, but relief maybe available through government subsidies to those institutions.

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