Last year U.S. Representative Steve Cohen of the Ninth District of Tennessee introduced a bill called the Private Student Loan Bankruptcy Fairness Act of 2011. The bill would make private student loans generally dischargeable in bankruptcy as a way of addressing the mounting student debt crisis that many have written about. This is what the bill would specifically do:
1. It would strike subpart B of Section 523(a)(8) of the Bankruptcy Code which makes general education-purpose loans nondischargeable (i.e. “(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual”);
2. The bill maintains the nondischargeability (absent proof of undue hardship) of government-guaranteed student loans, but ensures that non-profit-backed loans, generally excepted from discharge, are only nondischargeable if substantially all the funds for the loan program are provided by a non-profit. This tightens up the existing subpart A, which provides for the nondischargeability of any student loan even if only “part” of the program funding derives from a non-profit. If subpart A was left intact while subpart B was stricken, profit-driven loan programs could arrange token funding from a non-profit and skirt the law’s intent.
The bill was referred to a subcommittee in July 2011, and there it remains awaiting further action. So, I called the Congressman Cohen’s office today to get an update, and he kindly responded by email with the following comment:
“Although I held hearings and marked up the Private Student Loan Bankruptcy Fairness Act when I was Chairman of the Commercial and Administrative Law Subcommittee last Congress, the Republican leadership of the Judiciary Committee has not shown any interest in moving the bill forward in this Congress. Thanks to the recent report by NACBA, President Obama’s efforts to address the student loan debt crisis, and other press reports about the crushing student loan debt burden, we are continuing to bring attention to the bill and gaining additional cosponsors. I am hopeful that we will ultimately be able to pass the bill, particularly if control of the House changes hands again.”
This is where the bill stands as of February, 2012. Movement is unlikely until after 2013 when the new Congress sits after the November 2012 elections. It appears that the bill only has a chance of emerging from committee if the democrats retake the House. I’ll try to stay on top of the bill and update the information here or on my student loan blog.
Nicholas Ortiz, Boston Bankruptcy Attorney
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Last modified: March 31, 2013