Senate Bill Would Discharge Substantial Student Loan Debt to Medically Distressed

Chambliss, Bahner & Stophel, P.C.

Chambliss, Bahner & Stophel, P.C.

On February 2, 2021, Democratic Sens. Whitehouse, Brown, Blumenthal, Baldwin, and Warren introduced the Medical Bankruptcy Fairness Act of 2021. This Act resembles bankruptcy reform bills that the senators introduced in prior years, however, it does contain an addition that would fundamentally change student loan debt discharge in bankruptcy for the short term. In previous years, the bill sought to create a special category of debtors labeled as “Medically Distressed Debtors.” This type of debtor includes anyone who, in the three year period prior to filing bankruptcy, incurred medical debt greater than 10% of their adjusted gross income. Once established as a Medically Distressed Debtor, that person receives special protections with regard to retaining residential equity, is not required to meet certain administrative and financial counseling requirements other debtors must complete, and can discharge student loans without showing the loans create an undue hardship.

The 2021 Act contains a new subpart to the definition of a “Medically Distressed Debtor” that greatly expands who qualifies and it has nothing to do with medically created debts. Instead, the subpart allows anyone who experienced a change in employment status that resulted in a reduction in wages, salaries, commissions, or work hours, or resulted in unemployment due to the pandemic, to qualify as a Medically Distressed Debtor. While qualifying for excessive medical bills requires a person to demonstrate a percentage of debt was incurred, the pandemic-related addition only requires a reduction in the debtor’s pay or a period of unemployment. A debtor showing even the slightest reduction in wages or salary during the pandemic would qualify as a Medically Distressed Debtor and therefore receive the special benefits. 

The significant benefit that many will seek is the Amendment to 11 U.S.C.§ 523(a)(8), which authorizes a Medically Distressed Debtor to discharge student loan debt without having to demonstrate an undue hardship or any other evidence or analysis of their ability to repay student loan debt over time. The Act would further allow the Medically Distressed Debtor to exempt up to $250,000 in residential property equity value from the bankruptcy. Interestingly, the change to the bankruptcy code would only benefit those working during the pandemic and will require those determined to discharge their student loans to file bankruptcy within three years of the national emergency declared due to COVID-19.

Should Senate Bill 146 become law, we expect a significant uptick in personal bankruptcies as the small window of opportunity will create pressure to file quickly. This amendment offers no assistance to those who were in school when the pandemic began and does not address the more systemic issues that created the student loan debt issues many claim today. 

Those in the student loan industry and those carrying substantial student loan debt should pay close attention to Senate Bill 146 to see how it progresses through Congress during this session.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Chambliss, Bahner & Stophel, P.C. | Attorney Advertising

Written by:

Chambliss, Bahner & Stophel, P.C.

Chambliss, Bahner & Stophel, P.C. on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.