BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
AJR 11 (Wieckowski)
As Amended May 13, 2013
Hearing Date: June 18, 2013
Fiscal: No
Urgency: No
TMW
SUBJECT
Bankruptcy: Student Loan Debt
DESCRIPTION
This measure would urge Congress and the President of the United
States to support and pass legislation that would allow private
student loan debt to be dischargeable in a bankruptcy case filed
under Chapter 7 or Chapter 13 of the Bankruptcy Code.
BACKGROUND
Bankruptcy is a judicial process through which a consumer or
business (debtor) can eliminate or repay some or all of debt
owed to a creditor. The most commonly used bankruptcy
proceedings are Chapter 7 and Chapter 13 under the Bankruptcy
Code. Chapter 7 provides for the liquidation of the debtor's
property to pay back some of the debt and allows the debtor to
keep some of his or her property as an exemption from the
bankruptcy estate. Chapter 13 allows the debtor to keep all of
his or her property but monthly payments are established to
repay the debt.
In the bankruptcy proceeding, the debt is characterized as
secured (money was given to the debtor based on the debtor's
ownership of property or an asset that operates as collateral
for the money given) or unsecured (no property or asset was used
as collateral to secure the money given to the debtor). Common
types of secured debts include mortgages and automobile loans.
On the other hand, unsecured debt is further characterized as
priority or nonpriority debt. Priority debts rise to the top of
(more)
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the list of debts owed by the debtor and will be paid first
during Chapter 7 liquidation, and priority debts must be paid in
full during Chapter 13 bankruptcy. Priority debts include wages
owed by an employer to employees, alimony and child support, and
death or personal injury claims caused by intoxication.
Nonpriority debts include credit card debt, medical and utility
bills, personal loans, and student loans. The court may
authorize the elimination (discharge) of some of the debt, which
could include credit card, car loan, and gambling debt.
However, student loan debt is rarely dischargeable.
This author-sponsored measure would urge Congress and the
President of the United States to support and pass legislation
that would allow private student loan debt to be dischargeable
in Chapter 7 or Chapter 13 bankruptcy proceedings similar to the
dischargeability of other unsecured nonpriority debt.
CHANGES TO EXISTING LAW
This measure , the Financial Fresh Start Resolution of 2013,
would make the following legislative statements:
existing federal law exempts from discharge in a bankruptcy
case filed under Chapter 7 or Chapter 13 of the Bankruptcy
Code specified educational loans made, or secured, by a lender
other than the federal government, also known as private
student loans, unless the debtor convinces a bankruptcy court
that repayment would be an undue hardship on the debtor and
the debtor's dependents, a sometimes difficult and expensive
process not required to discharge other unsecured nonpriority
debt;
Californians should have the same ability to discharge their
private student loan debt as they do to discharge their
unsecured nonpriority debt;
Californians who are not given relief from their burden of
private student loan debt, even after a successful completion
of a bankruptcy case, are seriously hindered from establishing
personal economic stability and contributing to the economic
growth of the state;
United States Senator Dick Durban and Representative Steve
Cohen have recently introduced the following legislation in
their respective congressional houses that would permit
private student loan debt to be discharged in bankruptcy and
are substantially similar to legislation they each introduced
in 2010 and 2011: (a) The Fairness for Struggling Students
Act of 2013; and (b) The Private Student Loan Bankruptcy
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Fairness Act of 2013; and
the inability of Californians to more easily discharge private
student loan debt prevents them from gaining the "fresh start"
that a successful bankruptcy case is intended to provide.
This measure would urge the President and the Congress of the
United States to support and pass legislation that would allow
private student loan debt to be dischargeable in a bankruptcy
case filed under Chapter 7 or Chapter 13 of the Bankruptcy Code
similar to the dischargeability of unsecured nonpriority debt.
COMMENT
1. Stated need for the measure
The author writes:
Student loan debt is growing at an alarming rate in the United
States. At over $1 trillion, it has surpassed personal credit
card debt.
Private loans now comprise about 24 [percent] of the nation's
total education loan volume. These private student loans
generally have higher interest rates and stricter repayment
options than federal loans. Outstanding private student loan
debt exceeded $150 billion in 2012, held by more than 2.9
million borrowers. More than $8 billion of this debt is in
default, according to the Consumer Financial Protection
Bureau.
The inability to discharge private student loan debt through
bankruptcy the same way that other private debt is discharged
causes debtors to postpone life-cycle events such as buying a
home, getting married, or starting a family. The ability to
discharge private student loan debt would release debtors that
are unable to pay from their financial obligation.
Not only does the inability to discharge private loan debt
affect the individual debtor, it negatively impacts the United
States and California economy. . . . Dischargeability of
private student loan debt may also induce private student loan
lenders to improve their interest rates and repayment plans to
prevent student loan borrowers from going bankrupt and
discharging their private student loan debt.
2. Resolution urging dischargeability of student loan debt
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Bankruptcies are regulated by federal law under the Bankruptcy
Code. Under the Bankruptcy Code, student loan debts generally
are not dischargeable. However, the Bankruptcy Code previously
treated student loan debts the same as any other type of
unsecured debt, such as credit card and personal loan debts,
which may be discharged in a bankruptcy proceeding. But in
1976, Congress began to limit a debtor's ability to discharge
education loans made by government or non-profit colleges and
universities. Most recently, in 2005, as part of a
comprehensive rewrite of the Bankruptcy Code, Congress
eliminated the dischargeability of most private student loans.
In support of this bill, the Children's Advocacy Institute at
the University of San Diego School of Law writes:
Valid policy reasons exist for the few types of debt that are
not dischargeable under bankruptcy. Specifically, criminal
fines, child support, taxes and alimony are all
non-dischargeable to ensure a criminal or absent parent cannot
be relieved from these important financial obligations - the
non-payment of which all have significant social consequences.
Federal student loans, which are likely to have lower
interest rates and allow borrowers to pursue multiple types of
deferments, forbearance, and also income-based repayment, are
also not dischargeable for a valid policy reason. Namely, the
flexibility allotted repayment combined with the inability to
discharge these debts ensures repayment of federal student
loans and protects the interest of taxpayers and the
government.
A failure to repay private student loans will not result in
similar social consequences, nor do the federal government and
American taxpayers have a vested interest in the profitability
and repayment of these loans. Yet, when it comes to the
non-dischargeability of student loans, private student loan
creditors enjoy the same benefits as does the federal
government.
Unfortunately, even with this unprecedented benefit, private
lenders are not required to offer the same low interest rates
as federal loans, do not routinely work with graduates to
create manageable payment plans and amounts, and often seek
wage garnishment for debtors who have gone in to default.
As the cost of higher education skyrockets, private loans now
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total over 20 percent of the nation's total education loan
volume. Conversely, recent graduates are making less on
average than they were just a decade ago and face an unstable
employment market. The current landscape demands that the
unnecessary bankruptcy exemption from which private student
loan creditors benefit is reconsidered and eliminated.
At this time, the only exception to the nondischargeability of
student loan debt is if the debtor can establish undue hardship.
In Brunner v. New York State Higher Education Services Corp.
(1987) 831 F.2d 395, 396, the court provided a three-pronged
test for undue hardship of the debtor: (1) the debtor cannot
maintain a minimal standard of living if forced to repay the
loan; (2) additional circumstances exist indicating that this
state of affairs is likely to persist for a significant portion
of the repayment period for student loans; and (3) the debtor
has made good faith efforts to repay the loans. With respect to
the ability of debtors to prove undue hardship, the National
Association of Consumer Bankruptcy Attorneys reported that
"[o]ften only borrowers very close to the poverty level with
little or no hope for improvement are considered eligible. And
few debtors are able to avail themselves of the opportunity to
seek a discharge, because they cannot pay to fund the litigation
that is required to prove undue hardship, litigation has become
must more expensive because student loan creditors aggressively
defend such cases." (The Student Loan "Debt Bomb": America's
Next Mortgage-Style Economic Crisis?, Nat. Assoc. of Consumer
Bankruptcy Attorneys (Feb. 7, 2012) p. 6.)
A recent report on private student loan debt issued by the
Consumer Financial Protection Bureau noted that in the past
decade, private student loans grew from less than $5 billion in
2001, spiked at over $20 billion in 2008, then contracted to
less than $6 billion in 2011. (Consumer Financial Protection
Bureau, Private Student Loans, U.S. Dept. of Education (Aug. 29,
2012) < http://files.consumerfinance.gov/f/201207_cfpb_
Reports_Private-Student-Loans.pdf> [as of June 10, 2013] p. 3.)
Further, the report states that "[f]rom 2005-2007, lenders
increasingly marketed and disbursed loans directly to students,
reducing the involvement of schools in the process; indeed
during this period, the percentage of loans to undergraduates
made without school involvement or certification of need grew
from 18 [percent] to over 31 [percent]. As a result, many
students borrowed more than they needed to finance their
education. Additionally, during this period, lenders were more
likely to originate loans to borrowers with lower credit scores
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than they had previously been. These trends made private
student loans riskier for consumers." (Ibid.) As of the date
of the report, Americans owed more than $150 billion in
outstanding private student loan debt. (Ibid.)
The report further stated that private student loan borrowers do
not have the same repayment options as federal student loan
borrowers, "including the ability to cap payments as a
percentage of discretionary income and remain in good standing.
While this may lead to greater total payments over the life of
these loans, the borrower can more easily avoid the economic
consequences of delinquency or default. . . . [M]any distressed
student loan borrowers [are] facing trouble making payments on
private student loans due to limited options for alternate
payment options. Consumers, as well as businesses, have been
able to restructure other types of debts through bankruptcy as a
last resort. But with less guaranteed flexibility compared to
federal loans and very limited bankruptcy options compared to
other consumer loans, private student loan borrowers facing
tough economic times may be challenged to emerge as productive
contributors to our society." (Id. at p. 87.)
In January of this year, three United States Senators introduced
legislation, the Fairness for Struggling Students Act of 2013,
which would reverse the 2005 bankruptcy laws relating to student
loan debt. In a press release, Senator Dick Durbin stated as
follows: "In 2005, the [bankruptcy] law was unjustifiably
changed to give private student loans the same privileged
bankruptcy treatment as government loans, even though private
student loans have vastly different terms and fewer consumer
protections. Today's bill would restore the bankruptcy law, as
it pertains to private student loans, to the language that was
in place before 2005 so that privately issued student loans will
once again be dischargeable in bankruptcy like nearly all other
forms of private debt."
In support of that legislation, this measure would encourage
Congress and the President to support and pass legislation that
would return the ability of a debtor to eliminate a private
student loan debt through Chapter 7 or Chapter 13 bankruptcy
discharge similar to the dischargeability of other unsecured
nonpriority debt. As asserted by proponents, this bill would
urge Congress to remedy the unprecedented protection private
student loan creditors receive and, instead, protect the
financial security of the thousands of underemployed
Californians with oppressive private education loans.
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Support : California Council on Economic Education; California
State Student Association; Children's Advocacy Institute at the
University of San Diego School of Law; Latino Democratic Club;
Veterans Caucus of the California Democratic Party
Opposition : None Known
HISTORY
Source : Author
Related Pending Legislation :
AB 233 (Wieckowski) would prohibit issuance of a wage
garnishment order to collect on a private student loan debt
judgment. AB 233 is currently in this Committee.
AJR 20 (Perez) would request that the Congress and the President
of the United States enact legislation to maintain the interest
rate of 3.4 percent for Federal Direct Stafford Loans. AJR 20
is currently in the Assembly Committee on Higher Education.
Prior Legislation : None Known
Prior Vote :
Assembly Committee on Banking and Finance (Ayes 7, Noes 4)
Assembly Floor (Ayes 46, Noes 19)
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