Warren and Nadler

Sen. Elizabeth Warren (D-Mass.) and Congressman Jerry Nadler (D-N.Y.) are leading the fight for the Student Borrower Bankruptcy Relief Act of 2022. (Photo: Nadler for Congress)

Democrats Push to Lift Ban on Student Loan Bankruptcy Relief

"Modernizing and clarifying the consumer bankruptcy system is long overdue," said a leader at Public Citizen, one of many groups backing the bill.

On the heels of U.S. President Joe Biden's long-awaited student debt relief announcement, four congressional Democrats are pushing to overhaul the section of the bankruptcy code regarding private and federal educational loans.

"This legislation updates the federal bankruptcy code to ensure student loan debt is treated like almost every other form of consumer debt."

"Americans across the nation are facing crushing student loan debt that is preventing them from purchasing homes and living the true American dream," House Judiciary Committee Chair Jerry Nadler (D-N.Y.) said Thursday. "We must ensure that Americans are able to invest in their education and then go on to live quality lives without the cloud of rising debt hanging over their heads."

"I am pleased to introduce the bipartisan Student Borrower Bankruptcy Relief Act of 2022, which is a positive step in that effort," the congressman continued. "This legislation updates the federal bankruptcy code to ensure student loan debt is treated like almost every other form of consumer debt that can be discharged during bankruptcy."

Nadler and Sen. Elizabeth Warren (D-Mass.), a former Harvard University professor and a nationally renowned expert in bankruptcy law, are leading the fight for that change. They are joined by a pair of Rhode Island Democrats: Sen. Sheldon Whitehouse and Rep. David Cicilline, chair of the judiciary panel's Subcommittee on Antitrust, Commercial, and Administrative Law.

When the legislation--initially unveiled in 2020--was officially reintroduced last week, Warren said that it "takes long overdue steps to make it a little easier and a little less expensive for people who are in deep financial trouble to get meaningful bankruptcy relief."

As CBS News detailed last week:

The Consumer Bankruptcy Reform Act of 2022 would create a new provision in the U.S. bankruptcy code--Chapter 10--under which student loans would be treated like credit cards, medical expenses, and other consumer debt. Borrowers could file for Chapter 10 and have their student loan balance canceled with approval from a bankruptcy judge.

[...]

Warren's bill would also eliminate Chapter 13 bankruptcy, which allows people to pay off a portion of their personal debt over three to five years. In another important change, the bill would bar individuals from filing for Chapter 7--the provision companies often use to restructure their debts. Eliminating those two options in favor of a Chapter 10 filing would simplify the bankruptcy process, which is cumbersome and costly for most individuals, Warren's office said.

While CBS noted that the legislation faces an uncertain future in Congress--the makeup of which will shift after next month's midterm elections--a spokesperson for Warren highlighted that Biden "has already taken a historic step to reduce the crushing effects of student loan debt that can drive people to bankruptcy, and he endorsed the framework of this bill during his presidential campaign."

Congressional Democrats' renewed fight to reform bankruptcy law comes as the Biden administration sorts out the details of the president's pledge to forgive up to $20,000 in student debt for certain federal borrowers--an effort that some Republican officials are trying to stop in court.

However, "Biden himself has played a role in making bankruptcy standards stricter," Insidernoted Thursday. "In 2005, he supported the Bankruptcy Abuse Prevention and Consumer Protection Act as a senator, which expanded the undue hardship requirement to borrowers with private student loans, expanding the scope of borrowers who would have to prove their dire financial situation in court."

Warren, notably, spent years trying to prevent that 2005 law--which came up when she was battling Biden and other candidates for the 2020 Democratic presidential nomination, particularly when she revealed her bankruptcy reform plan, which also called for addressing the near-total ban on using the process for student debt relief.

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Warren and Nadler's bill is backed by 86 law professors who specialize in bankruptcy and consumer law as well as several advocacy groups, including Public Citizen, which "enthusiastically supports this critical set of reforms," according to executive vice president Lisa Gilbert.

Echoing the bill's sponsors, Gilbert said that "modernizing and clarifying the consumer bankruptcy system is long overdue, and in this time of national economic crisis, making it easier for individuals and families forced into bankruptcy to get back on their feet is just the right thing to do."

Ed Mierzwinski, senior director for federal consumer programs at U.S. PIRG., also welcomed efforts to pass the measure, which he said "will re-balance consumer rights to a fairer bankruptcy process and will give them a better chance to reorganize their finances, especially during a pandemic."

"Importantly, the proposal includes protections for both homeowners and renters, prohibits and punishes illegal practices by debt collectors and others, addresses racial and gender disparities in the bankruptcy system, and eliminates loopholes exploited by the wealthy," he noted. "Finally, it also eliminates one of the cruelest provisions in U.S. law by removing the provision that makes private and federal student loans nondischargeable."

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