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Senate panel to hold hearing on student loan bankruptcy reform, Durbin says

Senate Majority Whip Richard Durbin.
Senate Majority Whip Richard Durbin.Chip Somodevilla/Getty

WASHINGTON - Sen. Richard Durbin, D-Ill., chairman of the Senate Judiciary Committee, will hold a hearing Aug. 3 on student loan bankruptcy reforms to explore ways to lower the barriers borrowers face in discharging their education debt.

The Education Department is routinely contesting requests for bankruptcy discharges from people deep in debt and short on resources despite the ongoing economic fallout of the pandemic, The Washington Post reported this month.

Consumer advocates and liberal lawmakers including Durbin have long urged the department to revise its bankruptcy policy and called on Congress to revisit the restrictive standards it imposed.

Federal and private student loans can be cleared through bankruptcy, but the hurdles are high and discharges are rare.

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To have their student loans discharged, people must bring a separate lawsuit within their bankruptcy case - known as an adversary proceeding. They must convince the court that the debt would impose an "undue hardship" and fend off the lender from thwarting their effort. But consumer advocates say the bar is set too high for what constitutes undue hardship.

A growing number of bankruptcy judges have criticized the idea that people must prove a "certainty of hopelessness" to meet the Education Department's standard. And the department in the last two administrations has questioned whether its own policies were unnecessarily prohibitive.

The treatment of student loans in bankruptcy has been a point of contention between policymakers and consumer advocates for decades as the rules grew more restrictive. The Senate panel last held a hearing on the matter in 2012, but the pressure to revisit the issue has been building as student loan debt and defaults mushroom.

Durbin, a vocal critic of student loan bankruptcy practices, has pushed President Joe Biden on administrative solutions. A committee aide said the senator also wants to see changes to the bankruptcy code because the status quo is not sustainable as the scope and scale of the student debt burden continue to grow.

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There is bipartisan interest on Capitol Hill and from the administration to reform the bankruptcy system. Biden, who helped impose tougher consumer bankruptcy laws as a senator, said he now supports letting people who enter bankruptcy discharge their student debt.