Fresh Start Through Bankruptcy Act 2021: Big Student Loan Reform

fresh start through bankruptcy act

Fresh Start Through Bankruptcy Act 2021: Powerful Student Loan Reform

The Senate introduced bipartisan bill S2598 called Fresh Start Through Bankruptcy Act of 2021 or “Fresh Start bill” today. Student loan forgiveness becomes a real possibility.  This provides hope for much-needed bankruptcy reform for student loans.

(Technically, the student loan bankruptcy reform bill is called “‘Fostering Responsible Education Starts with Helping Students Through Accountability, Relief, and Taxpayer Protection Through Act of 2021” but we’ll use “FRESH START Through Bankruptcy Act of 2021.” or “Fresh Start Bill”)

October 2021 update: The S2598 Fresh Start bill is still stuck in committee, after almost three months.  There is no movement on it, and govtrack gives it a 1% chance of passing. However, this can change, particularly as we approach an election year.

Bankruptcy and Student Loans: The History

Student loan forgiveness in bankruptcy used to be the rule, after a set period of time. This student loan bankruptcy reform in the Fresh Start bill would reach back to the past and implement an aspect and time component for future cases, if passed. So let’s see where we’ve been, and where we may be headed with this student loan bankruptcy reform.


Before 1976, debtors could discharge student loans in bankruptcy like any other debt. Then, in 1978, Congress passed the Bankruptcy Reform Act of 1978. This made it so borrowers had to wait five years to discharge their student loans (unless there was some undue hardship). In 1981, the 8th Circuit added a “totality of the circumstances” test . In 1984, Congress tightened things up further, making it so private loans were generally not eligible to be discharged through bankruptcy.

Then, in 1987, the Second Circuit decided Brunner, which establishes a three-prong test for undue hardship still used today. Later, in 1990, Congress made student loan forgiveness even harder. It then passed more bankruptcy reform for student loans, making it even tougher, extending the five-year wait to seven years. Consequently, in 1998, even more limitations were added. These effectively ended a student loan bankruptcy discharge. There was an exception of seven years of struggling, and now some form of undue hardship.


Finally, in 2005, BAPCPA (the Bankruptcy Abuse Prevention and Consumer Protection Act) drove the final nail into student loan forgiveness. It excepted qualified student loans from discharge, and made it pretty much impossible to discharge student loans in bankruptcy.

The timing element was eliminated; no student loan forgiveness was available regardless of how long the borrower had been struggling with the student loans, and the borrower still had to show “undue hardship.” Spoiler alert: undue hardship became very difficult to demonstrate.

The net result was that student loans were and are generally nondischargeable in bankruptcy, though courts seem to be easing up on their interpretation of what constitutes undue hardship over recent years. Still, discharges don’t apply to student loans, for all intents and purposes, as of this writing in 2021. Student loan forgiveness and bankruptcy reform for student loans are badly needed.

In 2021, the Fresh Start Through Bankruptcy Act

This gets us to the Fresh Start bill, S2598, which would make federal student loans eligible for discharge in bankruptcy again. It’s not clear if the final version of the bill will also include private student loans.

This bankruptcy reform for student loans adds a timing element like pre-BAPCPA. It would allow for student loan forgiveness in bankruptcy ten years after the first loan payment was due. Providing hope for passage is that the Fresh Start through Bankruptcy Act of 2021 is bipartisan. Senator Richard Durbin (D-IL) and Senator John Cornyn (R-TX) are sponsoring the student loan forgiveness bill.

Note that the wording isn’t “ten years after breach” or “ten years of missed payments.” It’s ten years after the first payment was due. Then, it seems that a Chapter 7 bankruptcy filed after that time period would discharge the entire student loan. Now, that’s real bankruptcy reform for student loans!

More Fresh Start Act Terms

Further, has it been less than ten years after the first payment was due? If so, then the current “undue hardship” rule stays in place. This would be for both private student loans, as well as federally guaranteed student loans.

Also, this adds provisions so that colleges to have to reimburse the federal government. Uncle Sam could force some schools to refund student loans if many are discharged in bankruptcy. The Fresh Start through Bankruptcy Act helps students who can’t afford to repay their debt. These students can throw off the ball and chain and be free of their burden.

However, the BAPCPA Chapter 7 bankruptcy means test would still apply. This applies to people who can afford to repay some of their student loans. They wouldn’t be eligible for this bankruptcy reform for student loans in a Chapter 7. However, it could mean that someone who is eligible for a Chapter 13 bankruptcy could pay back some debt for five years. Then, at the end, someone could discharge all of their unpaid student loan debt.

S2598 Fresh Start Through Bankruptcy Act

S2598. This is the Senate Bill name for student loan forgiveness through bankruptcy.   The full name of the Senate bill is Fostering Responsible Education Starts with Helping Students Through Accountability, Relief, and Taxpayer Protection Through Bankruptcy Act of 2021. As Congress loves acronyms, it spells out the (somewhat?) shorter Fresh Start through Bankruptcy Act of 2021.

In other words, as a new development, we now have an even shorter name for it: Senate bill 2598 or, shorter, S 2598.

Front page of S2598

What is S2598?

Senate bill 2598 is the bill introduced in August 2021 into the U.S. Senate which would provide much-needed student loan bankruptcy reform.

So, what does this mean? There’s a long list of things that don’t go away in bankruptcy. Not surprisingly, student loans are on that list.

If this law passes, this would be student loan reform. However, the student loan forgiveness is through bankruptcy.  Consequently, it would change that list of exceptions in the Bankruptcy Code.  In other words, it would amend 11 USC 523 and allow student loan forgiveness in bankruptcy.

Consequently, if the new S2598 Fresh Start Act passes through Congress and is signed into law, student loan forgiveness is broadened to those who qualify and get a bankruptcy discharge.

Fresh Start Through Bankruptcy Act Proposed Text

What does FSTBA say?

The Fresh Start bill is subject to amendments in Congress in the months ahead. However, here’s what the relevant part of the bankruptcy reform for student loan bill’s initial text says:

“Section 523(a) of title 11, United States code, is amended by striking paragraph (8) and inserting the following:‘‘(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 nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship, or stipend received from a governmental unit or nonprofit institution, unless—

‘‘(A) excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents; or

‘‘(B) the first payment on such debt became due before the 10-year period (exclusive of any applicable suspension of the repayment period) ending on the date of the filing of the petition;

‘‘(8A) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—

‘‘(A) an obligation to repay funds received as an educational benefit, scholarship, or stipend, other than an obligation described in paragraph (8); or

‘‘(B) any educational loan, other than a loan described in paragraph (8), 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;’’

When would the Fresh Start Through Bankruptcy Act take effect?

First, Congress has to pass this student loan bankruptcy reform, then the president signs it. And again, by then, it could look very different then than it does now. However, the bill’s initial text provides that the law would take effect 180 days after it becomes enacted into law. So, the FSTBA would apply to all petitions filed 180 days or more after signed into law.

What Next for the FSTBA or Fresh Start Bill

The Senate leader referred the Fresh Start for Bankruptcy Act to the Senate Judiciary committee. With luck, it will pass the Senate and then the House. Compromises could change the bill’s text, and the student loan forgiveness terms. This could take weeks, months. It’s not clear what amendments or changes either chamber would make to this needed bankruptcy reform for student loans.

However, it’s encouraging that it’s a bipartisan bill, and provides more than a glimmer of hope that student loan bankruptcy reform will pass and we’ll soon see some real large-scale student loan forgiveness and relief.

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