Did I Paint Myself Into a Corner With My Loan Consolidation?

Question:

Dear Steve,

I went through Chapter 7 bankruptcy in April 2016 and all credit card debt was discharged. My Stafford student loans were, of course, not included in the discharge and so I’m back to paying those off slowly. However, while I was pursuing an MA degree in 2006, I needed loans above and beyond what Stafford could provide, so I used Sallie Mae’s Tuition Answer loans to use for living expenses. I’ve read that these loans can sometimes be discharged because they were loans provided directly to me and not to the educational institution for tuition or room & board, etc., but correct me if I’m wrong about that. In 2008, I consolidated these Sallie Mae loans at a lower interest rate with Key Bank. Looking at the original paperwork, I now see that there was a provision in the consolidation loan that it couldn’t be discharged in chapter 7. I don’t think my bankruptcy lawyer in 2016 included this consolidation loan in the list of debts to be discharged and I’m now getting calls for collection on this debt.

My questions are two-fold: 1) Did I paint myself into a corner by consolidating what could potentially have been discharged into a consolidation loan with a different lender that had that “no chapter 7 discharge” provision? and 2) What, if anything, could I do to retroactively apply the discharge decision by the bankruptcy court to this loan if it was mistakenly omitted?

I’m anticipating the answer is I will have to deal with collections and set up a payment plan and luckily I’ve found steady employment. Frustratingly, unlike Stafford loans, there was no option with the consolidation loan to defer payments while I was unemployed. Their rigidness was disheartening and the letters demanding payment in full of $40,000 while I was beginning the bankruptcy process were infuriating.

Any advice would be appreciated. I’m also reaching out to the lawyer who assisted me with the bankruptcy filing last year, but I would like another opinion. Thanks!

Ryan

Answer:

Dear Ryan,

I don’t think all hope is lost. Just because the paperwork has that provision in it does not make it so. I’ve never heard of anyone being able to contract themselves out of their legal right to discharge debt through federal law.

You should direct your attorney to look at these posts. Even Sallie Mae admitted the loans were vulnerable to discharge in bankruptcy and then putting them into the new loan that was also not a qualified educational loan should not change that fact.

If your attorney has additional questions they could contact one of the attorneys on this list. Attorney Austin Smith in New York is an expert in this exact issue.

Your attorney will probably need to file an Adversary Proceeding on this matter but I would be surprised if it did not result in a discharge of that loan.

Steve Rhode
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This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.