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Can private student loans get discharged in chapter 7?

Los Angeles, CA |

I have PRIVATE student loans that have been sold to collection agencies.

Attorney Answers 4

Posted

I would say what is sad is perpetuating the mythology that all "student loans" are nondischargeable. First of all, the Bankruptcy Code does not define "student loan." Section 523(a)(8) does render nondischargeable loans that are "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." Loans that do not fit any of those categories are not nondischargeable unless they are "a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code." Loans made by commercial financial institutions outside the FAFSA system very commonly did not meet the 221 requirements. The fact that they were made to a person who was a student does not make them a "qualified education loan." This argument may sound exotic, but it is based on the strict construction of the Bankruptcy Code. The fact that we don't have caselaw supporting this result is entirely explained by the widespread ignorance of bankruptcy practitioners who continue to parrot the "rule" that "student loans are not dischargeable" except for undue hardship. ( And for developing law on that subject read the Judge Pappas concurring opinion in Roth v. ECMC published by the 9th Cir. BAP yesterday questioning the ongoing viability of the Brunner test for hardship.)

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This answer is offered as a public service for general information only and may not be relied upon as legal advice.

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Michael Raymond Daymude

Michael Raymond Daymude

Posted

I've saved your answer, Ms. Sinclair. It's a keeper. And, thanks for the pointer!

Paula Brown Sinclair

Paula Brown Sinclair

Posted

You're welcome. There will be more activity on this subject. Get the NCLC practice manual.

Gary D. Bollinger

Gary D. Bollinger

Posted

Have you found a link to lenders who can issue a "qualified education loan."

Paula Brown Sinclair

Paula Brown Sinclair

Posted

I don't know of any such list. I read client's loan docs.

Susanne Ruiz Rodriguez

Susanne Ruiz Rodriguez

Posted

Sometimes people will take out a personal line of credit or signature loan and then use the money for tuition or books. That doesn't make it a student loan. It just makes it a personal loan they could have used for anything - they just happened to use it for school. Have successfully had those discharged.

Lisa Jane Espada

Lisa Jane Espada

Posted

http://www.bankruptcylawnetwork.com/student-loan-bankruptcy-problem-a-doozy/

Paula Brown Sinclair

Paula Brown Sinclair

Posted

Thank you for the link. Judge Esterbrook's opinion is nearly identical to Judge Pappas' concurrence in Roth v. ECMC. ECMC is very fond of arguing that a debtor has failed to prove all three points of the Brunner test. Note, however, that my argument on the dischargeability of private student loans is quite separate from the undue hardship proof. An obligation doesn't become nondischargeable under 523(a)(8) just become someone calls it a "student loan."

Posted

Read your loan contract. If it states that these loans are STUDENT loans which are federally insured, then they cannot be discharged in bankruptcy.

Be sure to designate "best answer." If you live in Oregon, you may call me for more detailed advice, 503-650-9662. Please be aware that each answer on this website is based upon the facts, or lack thereof, provided in the question. To be sure you get complete and comprehensive answers, based upon the totality of your situation, contact a local attorney who specializes in the area of law that involves your legal problem. Diane L. Gruber has been practicing law in Oregon for 26 years, specializing in family law, bankruptcy, estate planning and probate. Note: Diane L. Gruber does not represent you until a written fee agreement has been signed by you and Diane L. Gruber, and the fee listed in the agreement has been paid.

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Paula Brown Sinclair

Paula Brown Sinclair

Posted

Quite correct, Ms. Gruber, that the federal involvement loan results in non-dischargeability. It was common in the past for commercial banks to loan freely to students without federal involvement of any kind, counting on the Bankruptcy Code to eliminate all risk of collection. These loans are dischargeable like any other general unsecured personal loan. The NCLC student loan manual is an excellent resource on this issue.

Posted

Sadly, no. Since 2006, private student loans are treated the same as federally guaranteed loans, at least with respect to bankruptcy. You cannot discharge a student loan unless you file an adversary complaint and prove "undue hardship" which is nearly impossible to do. If you are disabled and/or over 60, you may have a shot at a hardship discharge.

You may be able to settle these debts if you have any funds available to do that. You may be able to file a chapter 13 if you can pay part of the debt on a monthly basis. There's not much else you can do - our student loan financing system is extremely biased in favor of lenders and needs to be changed.

This answer is for general information purposes only and is not legal advice. No attorney-client relationship is intended or formed by the posting of this answer.

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Lisa Jane Espada

Lisa Jane Espada

Posted

http://www.bankruptcylawnetwork.com/student-loan-bankruptcy-problem-a-doozy/

Elliott H Stone

Elliott H Stone

Posted

Here in the Central District of California the Bankruptcy bench is very conservative. While a discharge of "Private" student loans is possible in bankruptcy, you would be best advised to discuss your unique situation with both a student loan lawyer and a bankruptcy attorney who has or have special expertise in this areas of the law (I would caution you not to rely on the advise of out of state lawyers who’s experience with student loans is limited to one case). In addition to undue hardship, the Court is permitted under the code to consider what it refers to as "inflexible payment terms" and this is becoming very effective argument amongst the student loan bar. In addition, a Private loan borrower has many "non-bankruptcy" options in dealing with these loans. It is almost routine for private loan collection agencies to violate the California and Federal Fair Debt Collection statutes. While claims under these debt collection statutes don't elimiate the debt, they often create a settlement dialog which takes into account the private loan terms. I hope this helps.

Posted

Presently, all student loans are treated the same so long as they are true student loans. Just because you obtained a loan while a student does not automatically make the loan a student loan and therefore non-dischargeable. If you have any doubt whether your loan is a "student loan" that would be excepted from discharge you should consult with BK counsel prior to filing your petition. Additionally, legislation has again been introduced to make private loans dischargeable. If you can wait, it might behoove you to see if anything is likely to come from newly proposed legislation.

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