A new bill is being introduced by House Democrats called the Covid-19 Student Loan Relief Act of 2020. The bill seeks to amend §523 of the bankruptcy code. 11 U.S.C §523 deals with which types of debts are dischargeable in a bankruptcy proceeding. Currently §523(a)(8) creates an exception to discharge for debts incurred such as student loans that are backed by a governmental entity. Traditionally, student loans have been one of the most common type of debts that are nearly impossible to discharge. Courts have discharged student loan debt in only a handful of scenarios because the "undue hardship" standard has been prohibitively difficult to prove.
The bill proposes to amend the discharge exception to allow people to discharge their student loan debt if the pandemic and resulting recession have effected a person's income. The extent to which a person has been harmed is instrumental in the proposed legislation. For instance the bill proposes that people making less than $75,000 must have had their income decrease by 20% to qualify. For people with income of $125,000 or less their income must have been reduced by 30%. And lastly, for people with incomes exceeding $125,000 their income must be reduced by 40%.
Mary Gay Scanlon's (D-Pa.) bill is a new twist on student loan forgiveness. Her bill would require people to go through a means test to determine whether they were eligible. This would keep the loan forgiveness in the bankruptcy realm, and unlike other bills proposed in the past, Scanlon's bill would require people to go through the bankruptcy process to discharge their student loan debt. This seems like a practical compromise.
The next wave of stimulus packages should be coming in the next couple weeks. I highly doubt this bill gets included, or voted on, before the election this fall. But, if Biden takes the Executive and Democrats take back the Senate and maintain the house, as is looking likely according to polling data, then bills like this could get serious consideration. Especially, if the likes of Senator Warren (Elizabeth Warren is perhaps the leading scholar of Bankruptcy in the U.S.) are in the executive, maybe treasury secretary, maybe VP. We will have to wait an see, but until then student loan forgiveness is a hot topic and not likely to go away anytime soon during this recession.