It’s fairly common for someone to start a consultation with the phrase, “I read on the Internet…” When it comes to student loans, that phrase usually ends with, “that you can get rid of private student loans in bankruptcy.” Unfortunately, just like much other information floating around in the recesses of the World Wide Web, it just isn’t true. Part of the reason for this misconception is that over time the rules regarding getting rid of student loans in bankruptcy have changed.
The bottom line is that whether or not a student loan can be discharged is not dependent on whether or not it came from a federal or private source. Instead the analysis will depend on how the loan was used and where it was used. If the loan was taken out for “qualified higher education expenses” it will be considered to be nondischargeable, and in order to get the loan discharged (eliminated through bankruptcy), the student will have to show that it would be hardship to repay the debt. (Proving hardship to the court is the subject of another post.)
Qualified higher education expenses include a number of non-tuition expenses, such as room and board, supplies, books, and a computer. It’s important to remember that the loan must have been taken out to cover these expenses. It doesn’t matter if the loan was actually used for other expenses. On the other hand, if the loan was taken out for other reasons, such as a home equity loan that was used both to improve a home and pay education expenses, that loan should be dischargeable. Further, if the loan funds expenses beyond what the school determines to be the reasonable costs of attendance, that loan should be dischargeable.
Finally, in determining whether or not a private student loan is dischargeable, the loan must have been for attendance at a “eligible education institution”. Such an institution must be eligible to participate in a federal Title IV program. While most schools are eligible to participate in a Title IV program, unaccredited schools sometimes pop up that are not eligible. Loans taken out to go to such a school would be dischargeable.
Determining dischargeability of student loans involves a thorough analysis of the loan, the school, and the individual circumstances of the student (or whoever took out the loan for the student). Ultimately, the bankruptcy court will have to decide if the student has proved that the loan should be discharged.
If you are struggling with student loan debt, bankruptcy may provide some relief. By eliminating non-student loan debt, you can free up resources to allow you to repay your loans. Chapter 13 bankruptcy can also restructure your repayment for a period of three to five years. We hope you’ll come in for a free, no-obligation consultation to discuss your bankruptcy, and non-bankruptcy, options. You can make an appointment with an experienced Colorado bankruptcy attorney by calling 303.331.3403 or by using our online scheduling system.