The U.S. House Judiciary Committee has approved two (2) important potential changes to the Bankruptcy Code to protect consumers who are faced with overwhelming debt.
Student Loan Debt
The Committee passed H.R. 2648, the Student Borrower Bankruptcy Relief Act of 2019 which would restore the rights of bankruptcy debtors to discharge student loan debts. This is the first step in establishing an important right where educational loans are the primary cause of financial difficulty.
In the United States, student loan debt is estimated at $1.56 trillion in 2020, with the average borrower owing over $37,000. Under the current Bankruptcy Code, student loan debt is not dischargeable in any bankruptcy case unless there is a showing of “undue hardship”. 11 U.S.C. § 523(a)(8)(B).
Until 1976, a bankruptcy debtor could discharge student loan debt in a bankruptcy case. In 1976, Congress enacted Section 439(A) of the Higher Education Act of 1965. This law required that student loans are exempt from discharge in bankruptcy unless: 1) they became due more than five years before the date of filing, or 2) exempting the discharge would cause an “undue hardship” on the debtor and his dependents.
From 1978 to 2005, federal law expanded the exemption from discharge for student loan debt. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 further expanded the exemption to include “private” student loans.
The Committee also passed H.R. 8366, the Protecting Homeowners in Bankruptcy Act of 2020, which would create a national homestead exemption of no less than $100,000.
The “homestead exemption” in Section 522(d)(1) of the Bankruptcy Code allows a debtor to protect equity in their principal residence. Currently, a debtor can exempt a maximum of $25,150 – or $50,300 for a married couple – in their home.
New Jersey has no state law exemption for equity in your home. When a New Jersey homeowner files for Bankruptcy, the Bankruptcy Code may force repayment of debt simply due to equity in their home. Some states like Florida and Texas, offer state law homestead exemptions for $125,000 or more.
New Jersey ranks 4th in median home price. So the current exemption is particularly harsh on New Jersey homeowners seeking bankruptcy law protection. This limitation impacts older homeowners who have built equity in their home over time.
The Heroes Act passed by the House of Representatives back in May also contained the expanded homestead exemption.
Considering the current situation in Congress, the upcoming presidential election, and the fact that these bills were passed by committee only recently, it is unlikely that these bills will become law until sometime after a new Congress is seated in 2021. But if passed, these amendments to the Bankruptcy Code would offer significant protections to those faced with serious debt issues as a result of student loans or who wish to retain their home.