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How will the FRESH START Through Bankruptcy Act affect student loan debt?

While bankruptcy allows you to discharge many types of debt, student loan debt is usually left out of the equation. According to Insider, a recently proposed bill aims to change the way bankruptcy courts handle this type of debt.

The FRESH START Through Bankruptcy Act of 2021 would let people with student loan debt seek a discharge via bankruptcy after a ten-year waiting period. The goal is to prevent people from carrying debt indefinitely with no real means of paying it off.

What the bill intends to do

It is currently possible to discharge student loan debt, but the borrower must prove that paying back the loan would cause undue financial hardship. This requires filing suit against the company that issued the loan, which is a significant legal battle.

With this new bill, the undue hardship stipulation no longer applies after the ten-year waiting period. Holders of private and federal loans can file for bankruptcy and possibly have their debt discharged. Additionally, the bill obligates colleges to provide a partial refund to the government after a student loan discharge if more than one-third of the school’s students receive loans.

What this means for people saddled with excessive debt

As it stands now, discharging student debt through bankruptcy is exceedingly difficult. A recent Supreme Court case illustrates this point, where the court rejected a borrower because she could not prove undue hardship.

If the FRESH START Act passes, which it is likely to do thanks to its bipartisan support, borrowers will have another option when it comes to massive debt. This allows them to achieve a clean financial slate, which is crucial to building up their credit and establishing financial stability in the future.