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[Student loans] History of Amendments under the bankruptcy code

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I spend a lot of time drafting complaints in adversary proceedings to help people discharge their student loans in bankruptcy. In doing that, I often I have to explain how the laws have changed over the years about when a debtor could discharge her student loans.

Instead of keeping all that information in dull pdfs, I turned them into this slide so it can be quickly referenced.

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[Student loans] History of Amendments under the bankruptcy code

  1. 1. STUDENT LOANS & THE AMENDMENTS TO 523(A)(8) Discharged
  2. 2. Bankruptcy Amendments and Federal Judiciary Act of 1984 § 439A of the Higher Education Act The Bankruptcy Reform Act of 1978 Act on August 14, 1979 1976 Crime Control Act of 1990 Higher Education Amendments of 1998 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 The Amendments
  3. 3. The Bankruptcy Act Commission In 1970, Congress established the Bankruptcy Act Commission. Its purpose? Review the Bankruptcy Act of 1898 and recommend changes. One recommendation it made was to make educational debt nondischargeable only if the debt had first become due less than 5 years before the debtor filed his bankruptcy case repaying the loan would not impose an undue hardship on the debtor or his dependents. The Commission proposed this discharge limitation to preempt “potential abuses” by student loan debtors seeking to discharge their student loan debt without having attempted repayment and in the absence of extenuating circumstances. The Commission proposed this despite evidence showing that less than 1% of federally backed student loans were discharged in bankruptcy.
  4. 4. The Higher Education Act Section 439A In 1976, Congress amended the Higher Education Act of 1965 by adding section 439A. That section allowed chapter 7 debtors to discharge federally guaranteed or insured student loans in two instances: 1. After 5 years have passed since entering repayment on the loan; or 2. Earlier than 5 years if repayment would cause an undue hardship. The Commission proposed this despite evidence showing that less than 1% of federally backed student loans were discharged in bankruptcy.
  5. 5. At a time when political, business, and social morality are major issues, it is dangerous to enact a law that is almost specifically designed to encourage fraud. For example, as a student leaves college to find a job, that student would have two options: (1) repay a substantial loan at a time when that student’s financial situation is probably at its lowest, or (2) discharge the debt in bankruptcy, having received the benefit of a free education. If Student A elects to repay the loan, honoring the legal and moral obligation that was incurred, he begins his career with a substantial debt and the accompanying financial pressure. Meanwhile, Student B (who chooses to declare bankruptcy) can begin with a clean slate and is free to spend his initial earnings on other items. By combining the clean slate with the excellent credit rating that accompanies a bankruptcy (since the discharged debtor cannot go bankrupt again for six years), Student B is rewarded for refusing to honor a legal obligation. The lesson that Students A and B have learned is that it “does not pay” to honor one’s debts or other legal obligations. “A valuable educational program should not be destroyed because of a loophole that Congress can easily correct.” Comments of Rep. Allen Ertel
  6. 6. 439A Amendment (a) A debt which is a loan insured or guaranteed under the authority of this part may be released by a discharge in bankruptcy under the Bankruptcy Act only if such discharge is granted after the five-year period (exclusive of any applicable suspension of the repayment period) beginning on the date of commencement of the repayment period of such loan, except that prior to the expiration of that five-year period, such loan may be released only if the court in which the proceeding is pending determines that payment from future income or other wealth will impose an undue hardship on the debtor or his dependents. (b) Subsection (a) of this section shall be effective with respect to Effective date, any proceedings begun under the Bankruptcy Act on or after September 30, 1977. Congress delayed the provision’s effective date for two reasons. First, it wanted the chance to review the GAO study of the discharge of federally backed student loans in bankruptcy. Second,it wanted to reconsider the propriety of the provision.
  7. 7. The Bankruptcy Reform Act of 1978 In 1978, Congress codified section 439A into 11 USC § 523(a)(8) of the newly formed Uniform Bankruptcy Code: (a) A discharge under section 727 … of this title does not discharge an individual debtor from any debt (8) to a governmental unit, or a nonprofit institution of higher education, for an educational loan, unless— (A) such loan first became due before five years before the date of the filing of the petition; or (B) excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents; Congress delayed the provision’s effective date for two reasons. First, it wanted the chance to review the GAO study of the discharge of federally backed student loans in bankruptcy. Second,it wanted to reconsider the propriety of the provision.
  8. 8. Act on August 14, 1979 Congress amended 523(a)(8) to read: a) A discharge under section 727 … of this title does not discharge an individual debtor from any debt (8) for an educational loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or a nonprofit institution of higher education , unless— (A) such loan first became due before five years (exclusive of any applicable suspension of the repayment period) before the date of the filing of the petition; or (B) excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents; Congress delayed the provision’s effective date for two reasons. First, it wanted the chance to review the GAO study of the discharge of federally backed student loans in bankruptcy. Second,it wanted to reconsider the propriety of the provision. Pub. L. No. 96–56, § 3
  9. 9. Comparing Amendments (a) A discharge under section 727 … of this title does not discharge an individual debtor from any debt (8) to a governmental unit, or a nonprofit institution of higher education, for an educational loan, unless— (A) such loan first became due before five years before the date of the filing of the petition; or (B) excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents; (a) A discharge under section 727 … of this title does not discharge an individual debtor from any debt (8) for an educational loan made insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or a nonprofit institution of higher education, unless— (A) such loan first became due (exclusive of any applicable suspension of the repayment period) before five years before the date of the filing of the petition; or (B) excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents; Bankruptcy Reform Act of 1978 Act of August 14, 1979 vs.
  10. 10. Bankruptcy Amendments and Federal Judiciary Act of 1984 Congress next amended 523(a)(8) on July 10, 1984. Congress amended the subsection by striking the phrase it had just added in the last amendment: “of higher education”. That change resulted in broadening the type of institutions covered. Congress delayed the provision’s effective date for two reasons. First, it wanted the chance to review the GAO study of the discharge of federally backed student loans in bankruptcy. Second,it wanted to reconsider the propriety of the provision. Pub. L. No. 98–353, § 454(a)(2)
  11. 11. Comparing Amendments (a) A discharge under section 727 … of this title does not discharge an individual debtor from any debt (8) from an educational loan made insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or a nonprofit institution of higher education, unless— (A) such loan first became due (exclusive of any applicable suspension of the repayment period) before five years before the date of the filing of the petition; or (B) excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents; (a) A discharge under section 727 … of this title does not discharge an individual debtor from any debt (8) from an educational loan made insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or a nonprofit institution, unless— (A) such loan first became due before five years (exclusive of any applicable suspension of the repayment period) before the date of the filing of the petition; or (B) excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents; Act of August 14, 1979 Federal Judiciary Act of 1984 vs.
  12. 12. Crime Control Act of 1990 Congress amended 523(a)(8) to read: (a) A discharge under section 727 … of this title does not discharge an individual debtor from any debt (8) for an educational benefit overpayment or loan made insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or a nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless— (A) such loan, benefit, scholarship, or stipend overpayment first became due seven years (exclusive of any applicable suspension of the repayment period) before the date of the filing of the petition; or (B) excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents; Congress delayed the provision’s effective date for two reasons. First, it wanted the chance to review the GAO study of the discharge of federally backed student loans in bankruptcy. Second,it wanted to reconsider the propriety of the provision. Pub. L. No. 101–647, § 3621
  13. 13. Comparing Amendments (a) A discharge under section 727 … of this title does not discharge an individual debtor from any debt (8) for an educational loan made insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or a nonprofit institution, unless— (A) such loan first became due before five years (exclusive of any applicable suspension of the repayment period) before the date of the filing of the petition; or (B) excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents; (a) A discharge under section 727 … of this title does not discharge an individual debtor from any debt (8) for an educational benefit overpayment or loan made insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or a nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless— (A) such loan, benefit, scholarship, or stipend overpayment first became due seven years (exclusive of any applicable suspension of the repayment period) before the date of the filing of the petition; or (B) excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents; Federal Judiciary Act of 1984 Crime Control Act of 1990 vs.
  14. 14. Higher Education Amendments of 1998 On October 7, 1998, Congress amended 523(a)(8) eliminated the time-lapse requirement. This change made certain education loans nondischargeable in the absence of undue hardship. (a) A discharge under section 727 … of this title does not discharge an individual debtor from any debt (8) for an educational benefit overpayment or loan made insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or a nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents; Congress delayed the provision’s effective date for two reasons. First, it wanted the chance to review the GAO study of the discharge of federally backed student loans in bankruptcy. Second,it wanted to reconsider the propriety of the provision. Pub. L. No. 105–244, § 971(a)
  15. 15. Comparing Amendments (a) A discharge under section 727 … of this title does not discharge an individual debtor from any debt (8) for an educational benefit overpayment or loan made insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or a nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless— (A) such loan, benefit, scholarship, or stipend overpayment first became due seven years (exclusive of any applicable suspension of the repayment period) before the date of the filing of the petition; or (B) excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents; (a) A discharge under section 727 … of this title does not discharge an individual debtor from any debt (8) for an educational benefit overpayment or loan made insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or a nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents; Crime Control Act of 1990 Higher Education Amendments of 1998 vs.
  16. 16. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 Finally, 0n April 20, 2005, Congress amended 523(a)(8). With this amendment, Congress again broadened the scope of loans covered under the subsection. (a) A discharge under section 727 … of this title does not discharge an individual debtor from any debt (8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for— “(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or “(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or “(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; Congress delayed the provision’s effective date for two reasons. First, it wanted the chance to review the GAO study of the discharge of federally backed student loans in bankruptcy. Second,it wanted to reconsider the propriety of the provision. Pub. L. No. 105–244, § 971(a)
  17. 17. Comparing Amendments (a) A discharge under section 727 … of this title does not discharge an individual debtor from any debt (8) for an educational benefit overpayment or loan made insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or a nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents; (a) A discharge under section 727 … of this title does not discharge an individual debtor from any debt (8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for— (A) (i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or (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; Higher Education Amendments of 1998 BAPCPA 2005 vs.
  18. 18. Miscellaneous
  19. 19. Chapter 13 debtors & 523(a)(8) On November 5, 1990, Congress passed the Omnibus Budget Reconciliation Act of 1990. Until passing that Act, debtors who filed a chapter 13 — unlike debtors who filed a chapter 7 — could discharge their student loans without having to wait for time to pass or having to show undue hardship. Congress did away with that “loophole” by amending 11 USC § 1328(a)(2) to make 523(a)(8) applicable to chapter 13 debtors. At first, Congress intended for this change to be temporary. We know this because Congress added a sunset provision in the Act that made the amendment ineffective on October 1, 1996. Congress later repealed the sunset provision, however, as part of the Higher Education Amendments of 1992. Now the dischargeability provision works the same whether a debtor files a chapter 7 or a chapter 13. Congress delayed the provision’s effective date for two reasons. First, it wanted the chance to review the GAO study of the discharge of federally backed student loans in bankruptcy. Second,it wanted to reconsider the propriety of the provision. Pub. L. No. 101–508, §§ 3007, 3008 Pub. L. No. 102-325, § 1558
  20. 20. – End –

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