A bill introduced by Democratic U.S. senators looks to make it easier for Americans to discharge student loans and medical debt. If passed as currently written, the Medical Bankruptcy Fairness Act of 2021 would drastically change the U.S. bankruptcy system by removing certain procedural hurdles that make the bankruptcy process complex and by creating a clearer path to discharging debts that impact millions of Americans.
The bill is in direct response to the struggles posed by COVID-19 and to address a potential influx in bankruptcy filings as a result of Americans losing their jobs and insurance due to the pandemic. U.S. Senator Sheldon Whitehouse (D-RI) stated, “[w]e need to ease the burden on families dealing with the health and financial fallout from this pandemic, our employment-based health insurance system is ill-suited for a pandemic.”
The bill proposes several changes to the current bankruptcy process, including:
- Waive procedural hurdles like credit counseling. This is currently required for most individuals during the bankruptcy process. Many consider this requirement unnecessary as certain debts, such as medical debt, are incurred through no fault of the debtor, and counseling would provide little to no benefit;
- Providing additional protections to an individual’s home by allowing a retention of at least $250,000 in home equity;
- Create a more accommodating bankruptcy process for those who are forced into bankruptcy because of medical debt or because they lost their jobs due to a public health-related shutdown (e.g., COVID-19); and
- Permit the discharge of student loans, which under the current system, is an uncommon occurrence.
Currently, student loan debt is treated differently than other kinds of debt in that the debtor must show an “undue hardship” before having their student loan discharged. Additionally, debtors must initiate an adversary proceeding, essentially a lawsuit within the bankruptcy, and show the borrower meets the undue hardship standard before student loan debt can be discharged. A student loan lender is allowed to produce evidence the debtor has not satisfied the undue hardship standard, making it more challenging for a debtor to ultimately discharge student loan debt.
Democratic senators proposed a similar bill last year, which failed to pass through the then-Republican controlled Senate. With the Democratic party holding majorities in both houses of Congress, albeit solely by the vice president’s ability to cast a “yes” vote to break a tie in the Senate, the bill stands a better chance of passing. Given the various relief measures being discussed by Congress and the potential widespread impact on the U.S. bankruptcy process, it will be important to keep a close watch as Congress considers the bill.