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    Chapter 7 Bankruptcy

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    Biden Loan Forgiveness & Bankruptcy

    President Joe Biden announced his long-awaited student loan forgiveness plan. The plan, which was telegraphed in his campaign promises of $10,000 forgiveness per borrower, came in at that level – more if you qualified for Pell Grants while in school. However, the plan drew criticism from both sides of the political spectrum, with some claiming that it was not enough relief (particularly in regards to bankruptcy) while others claimed it went too far – and they promised to do everything they could to stop it.

    For those eyeing bankruptcy as an answer to their student loan debt, the plan did nothing to fix the long-standing issues that face anyone trying to discharge student loan debt through bankruptcy. However, the block grant of up to $20,000 in relief is expected to clear the debt entirely for millions of borrowers, perhaps alleviating many of these would-be filers’ need for bankruptcy reform without touching bankruptcy rules directly.

    Up to $20,000 Per Federal Loan Borrower, Lower Interest & Monthly Payments

    The headline of the announcement was the relief of at least $10,000 per borrower (capped, of course, at the actual amount of outstanding loans). Borrowers will be eligible for an additional $10,000 of relief if they received a Pell Grant in college.

    The plan is widely expected to relieve the student loan debt of millions of borrowers. While the application for relief is not yet available, you can sign up for alerts on the Department of Education’s website.

    A further provision in the plan that has not received nearly as much attention in the press is reformed to repayment plans, interest, and capitalization. As Q13 Fox reports, pending regulations in the Federal Register, if they are approved, would reduce how often student loan interest is capitalized (such as stopping capitalization when loans enter forbearance) which would reduce the amount of interest accrued overall. Furthermore, an income-based repayment plan change would reduce once payment from 10% of discretionary income to only 5% of discretionary income and adjust the factors that determine discretionary income to give more credit for non-discretionary expenses. All combined, this should reduce borrowers’ monthly payments and the amount of interest they accrue over their lifetimes.

    Widespread Criticism of the Plan

    President Biden’s plan, despite providing relief to millions, was not without its critics from both sides of the proverbial aisle. Democrats, especially Sen. Elizabeth Warren, criticized the plan for not going far enough. Sen. Warren has repeatedly called for even more student loan forgiveness, has highlighted the unfairness of forgiving public loans while ignoring private student loans, and continues to push for reforms that would aid in discharging student loan debt in bankruptcy.

    Republicans, meanwhile, argued that President Biden went far beyond his constitutional powers. Furthermore, many states have already announced that they will tax this loan forgiveness, blunting some of the relief that will come from the president’s plan for borrowers in those states. Many have signed on to a letter demanding that the president pull back his proposed plan, and it is expected that litigation challenging the plan will be pursued.

    Bankruptcy and Student Loan Debt: Still Nearly Impossible

    The president’s reforms did not include changing anything about student loan debt and bankruptcy. The president has previously been criticized for signing on to the bill many years ago that made discharging student loans in bankruptcy such an incredibly difficult feat. And while we have pushed against the myth that student loan debt is categorically non-dischargeable in bankruptcy, it remains true that it is extremely difficult and requires filing a court case to prove that repaying the debt is an undue burden – a test that requires the borrower to prove that they cannot maintain a minimal standard of living, that their circumstances aren’t likely to improve, and that they have made a good-faith effort to repay their debt.

    Earlier this month, Sen. Warren renewed her calls for the administration to provide information on how they are responding to student loan bankruptcy filings. In recent years, other democratic lawmakers have attempted to pass legislation that would remove the undue burden standard from student loan bankruptcy cases, so long as at least 10 years have passed since the loans were taken out. Despite these efforts, no reforms have been passed and none are currently known to be close to fruition.

    Despite the lack of direct reform and bankruptcy laws, no matter how necessary and overdue it is, the mass forgiveness of up to $20,000 per borrower to millions of borrowers should help those struggling with student loan debt repayment significantly. Many of these borrowers would have qualified for income-based repayment regardless, but getting an instant discharge of their loans should help many move closer to a balanced monthly budget.

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