Bankruptcy Law and Student Loans

Private Student loans are very dischargeable in bankruptcy and I’m going to show you are.   These types on loans can be as dischargeable as a credit card.  Let’s take a look at the Bankruptcy Code.

Section 523(a)(8) of the Bankruptcy Code (2005) states:
unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for–(A)(i) 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 (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or (B) any other educational loan 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.

Let’s break this down in everyday English.  

Student loans can’t be discharged if the loans are:

(A)(i) 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; 

Are your student loans funded by the government or a nonprofit entity?   Especially if you have Tuition Answer (Direct to Consumer) loans, this would not apply.  So, strike this one off your list.

OR

(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; 

Now this may be the first thing your lender’s lawyer will hit you with.  Let’s explain it.  Educational Benefit is not defined in the Bankruptcy code, BUT the bankruptcy code DOES say what it’s not.  It’s not a loan.  That’s a separate entity.  Let’s go back to § 523(a)(8)(A)(i).  § 523(a)(8)(A)(i) states: an educational benefit overpayment OR loan made,…”  The Bankruptcy code is clearly separating the two entities as they are not one.  The Bankruptcy code clearly adds the term “loan” in (A)(i) and leaves out the term ‘loan” in (A)(ii).  “A ‘loan’ is not an ‘educational benefit’ within § 523(a)(8)(A)(ii).” 

So, your Tuition Answer loans and many other private loans would not qualify for this one either.  Strike two.

OR

(B) any other educational loan 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.

Okay, this is where many private student loans are gonna live.  Are your private student loans a qualified education loan?  I dug a little deep in order to answer this question. If your Private Student Loan had Cost of Attendance and Student Eligibility Issues, you’re well on your way to a discharge.  When I say Cost of Attendance issues, did your private student loan holder give you more than the school cost during your time of attendance?  Let’s say it costs $20,000 a year to attend John Doe University, but your Student loan lender gave you $30,000.  Or you weren’t actually in school when you incurred your loans.  For some reason, you  were never admitted or enrolled in classes, then your loans will run into Student Eligibility issues and will become dischargeable per the Bankruptcy code. 

 

This article by Private Student Loan Hell first appeared on Private Student Loan Hell and was distributed by the Personal Finance Syndication Network.