Senator Elizabeth Warren plans this week to reintroduce a bill that would overhaul U.S. bankruptcy rules and create a potential path for Americans to erase their student loan debt.
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 cancelled with approval from a bankruptcy judge.
The Massachusetts Democrat is set to introduce the measure on Thursday at a House Judiciary hearing on bankruptcy reform. Warren’s proposal, co-sponsored by Democrat Jerrold Nadler of New York, comes as student loan debt has reached a record $1.7 trillion. Federal student loan payments, which have paused for the past two years because of the pandemic, are set to restart January 1.
Warren first introduced the legislation in 2020, but it stalled amid Republican opposition in the Senate.
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.
Bankruptcy reform has long been a signature issue for Warren, a Massachusetts Democrat who taught bankruptcy law at Harvard University in the early 1990s and who is the author of many scholarly papers, articles and books on the subject. As part of that focus, she has argued that current bankruptcy law hurts the average American because it bars them from discharging student loans or home mortgages — often the two biggest obligations for consumers.
Filing for personal bankruptcy has significant drawbacks, experts note. For example, a bankruptcy is noted on a consumer’s credit report for at least seven years, making it tougher to get a mortgage, auto loan or credit card. Recovering from bankruptcy can thus take years, said Jacob Channel, a senior economist at LendingTree.
Still, for Americans crushed under five- or six-figure loan balances, bankruptcy might be the only viable option. Before 1976, Americans could file for bankruptcy and have their student loans erased. With the support of lenders and other corporations, the bankruptcy code was changed in 1978 and 2005 to discourage what critics called bankruptcy abuse, making it more difficult to eliminate those debts.
Warren’s bill faces considerable obstacles on Capitol Hill, even before the uncertain outcome of this November’s midterm elections. But Congress could be more receptive now because of renewed public attention on the crushing burden of student debt, including President Biden’s move last month to cancel up to $20,000 in loans for some borrowers, a spokesperson for Warren told CBS MoneyWatch.
“President 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,” the spokesperson said.
