Key Bankruptcy Reforms In Reach, Whoever Wins Congress

By Vince Sullivan
Published on Law360 (November 4, 2022, 7:03 PM EDT)

The $1 trillion student loan debt crisis and disputes over third-party releases have converged into a rare bipartisan issue for lawmakers, and the next congress will be well positioned to address these issues through bankruptcy reform legislation, regardless of how the election turns out, experts say.
Democrats currently enjoy control of both houses of Congress and the White House but have not been able or eager to push forward with major bankruptcy reforms over the past two years. In the absence of a legislative solution to the burgeoning student debt crisis, President Joe Biden enacted sweeping loan forgiveness via executive action earlier this year, but that move has stagnated over legal challenges
Likewise, contentious non-debtor third-party releases have drawn interest in the current Congress, but concrete action has been hard to come by, even as circuit courts are mulling over the question of their appropriateness.

In the contest of student loan debt, a legislative fix that lowers the bar to obtain a discharge of educational loans in a bankruptcy case may be the easiest method to provide relief, Douglas G. Baird of the University of Chicago Law School told Law360.

Currently, getting a discharge of a student loan through a personal bankruptcy filing requires a showing of substantial hardship, a standard that has become increasingly difficult to meet. But Baird said a small change to the federal bankruptcy code could provide an opportunity to set a new bar.
“There should be an opportunity for Congress to come in and say, ‘Let’s push the reset button and give the courts a chance to define what it means to discharge student debts,'” Baird said.
With about $1.75 trillion in outstanding student loan debt in the country, that silo of borrowing is now second only to home mortgage debt and has been recognized by candidates of both major parties as a critical issue ahead of the midterm elections.

The potential solutions to the crisis have become a focal point in some campaigns in the run-up to Election Day, with Biden’s move to forgive student loans for some borrowers via executive action drawing criticism from across the aisle.
“It’s totally become a partisan issue even though it probably shouldn’t be,” Jeremy R. Fischer of the law firm Drummond Woodsum told Law360. Fischer also serves as co-chair of the American BankruptcyInstitute’s legislation committee, which doesn’t take positions on legislative proposals, and served three terms in the Maine Legislature as a Democrat.

Fischer agrees addressing student loan debt in a bankruptcy context may be a smaller pill to swallow for opponents of outright loan forgiveness, as the requirement to file bankruptcy to obtain a loan discharge means borrowers aren’t getting away without consequences.
“I think if [Congress] focused on the bankruptcy side of it and looked at the scope of the discharge, that might be an easier place than forgiving the debt for everybody,” he said. “With forgiveness, the criticism has been that it’s too broad … If you only did it for people who find themselves in bankruptcy, in a situation where they’ll lose most of their assets and can only get relief through a…view full story.