Senator Warren: U.S. bankruptcy system is 'fundamentally wrong' on student debt

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Debtors filing for personal bankruptcy often struggle to successfully include student debt for discharge, and Senator Elizabeth Warren (D-MA) thinks the current system is "fundamentally wrong."

"When somebody goes into bankruptcy, right now, they can cancel credit card debt, they can cancel medical debt, they can cancel excess debt on their car loan, they can cancel debt that exceeds the value of a home they might have, but it’s virtually impossible to cancel student loan debt... that’s fundamentally wrong," Warren told Yahoo Finance (video above). "Student loan debt should be canceled in bankruptcy."

House Judiciary Committee Chairman Jerry Nadler (D-NY) and Warren previously introduced the ‘Consumer Bankruptcy Reform Act of 2020,’ which proposes to replace the current systems of chapter 7 and chapter 13 personal bankruptcies with one system, chapter 10, that would include broader eligibility for discharging student loans in bankruptcy.

WASHINGTON, DC - MARCH 01: Sen. Elizabeth Warren (D-MA) holds a news conference to announce legislation that would tax the net worth of America's wealthiest individuals at the U.S. Capitol on March 01, 2021 in Washington, DC. Citing growing inequalities during the coronavirus pandemic, Warren, Rep. Pramila Jayapal (D-WA) and Rep. Brendan Boyle (D-PA) introduced the bill that would apply a two-percent tax on people worth more than $50 million and an additional one-percent surcharge for net worth above $1 billion. (Photo by Chip Somodevilla/Getty Images)
Sen. Elizabeth Warren (D-MA) holds a news conference at the U.S. Capitol on March 01, 2021 in Washington, DC. (Photo: Chip Somodevilla/Getty Images) (Chip Somodevilla via Getty Images)

Yahoo Finance has chronicled cases of debtors successfully winning a discharge on their student loans in bankruptcy court, including stories of a grandmother in Nebraska, a former public servant in Arkansas, and a medical school graduate who failed to obtain a job in the field.

And while these cases highlight the emerging trend of student loan borrowers finding relief through personal bankruptcy, Warren noted that discharge through personal bankruptcy is not a scalable solution.

The discharge of student debt in bankruptcy "should be there for the extreme cases... sometimes people who have $200,000 of student loan debt because they haven’t paid for a long time. And it’s interest and penalties that have accumulated — they’re never going to get out from underneath it. And they have very, very small incomes. Those are people for whom bankruptcy makes a lot of sense."

Warren, who chairs the Subcommittee on Economic Policy at the Senate Committee on Banking, Housing, and Urban Affairs, stressed that any bankruptcy reform should include broad forgiveness of existing student loan debt.

"Bankruptcy doesn’t make sense" for most borrowers, Warren said. "For everyone else, the federal government should not be throwing people into bankruptcy to try to deal with run of the mill student loan debt. It is time to cancel $50,000 of student loan debt."

Warren and Senate Majority Leader Chuck Schumer (D-NY) have both repeatedly urged a skeptical Biden to cancel $50,000 in federally-held student loan debt via executive action (as opposed to legislation passed by Congress).

White House Chief of Staff Ron Klain recently told Politico that the president asked Education Secretary Miguel Cardona to "prepare a memo on the president's legal authority" before any decision.

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Aarthi is a reporter for Yahoo Finance. She can be reached at [email protected]. Follow her on Twitter @aarthiswami.

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