You may have heard that student loans are exempt from bankruptcy. That’s not entirely true. Private and federal student loans can be discharged in bankruptcy, but the procedure is more onerous than paying off credit card debt, medical bills, and other types of debt.
Because federal student loans provide flexible, income-based repayment plans, deferments, forbearances, and loan forgiveness, they are less likely to be discharged in bankruptcy. Due to these factors, it can be difficult for student loan borrowers to demonstrate that they are experiencing an undue hardship, which is a requirement before a judge will even consider cancelling any type of student loan debt.
But unlike the Department of Education, private student loan lenders do not provide the same kinds of benefits. It’s simpler to declare bankruptcy and obtain a discharge for private student loans, though the judge will still find it difficult to grant the discharge. Additionally, there is new bankruptcy law emerging from cases and legislation that is being considered that may eventually enable borrowers to cancel their private loans without having to go through additional hoops.
Depending on your financial situation, settlement or student loan refinancing may be an option if you’re struggling under the weight of your private loans. Make an appointment to speak with a student loan lawyer if you need assistance determining your options.
When did private student loans become nondischargeable?
Private student loans didn’t receive the same treatment as federal student loans until 2005, though federal student loans have been non-dischargeable in bankruptcy since 1976. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was passed by Congress in order to make it more difficult for borrowers to file for Chapter 7 bankruptcy and encourage more debtors to file Chapter 13 bankruptcy.
To prevent the bankruptcy discharge of education loans that did not exceed the student’s cost of attendance at specific higher education institutions, Congress amended 11 USC 523(a)(8) as part of the Act. These debts are known as “qualified education loans.”
Related: Can Private Student Loans Be Discharged Due to Disability?
The simplest way to determine what kind of student loans you have is to compare the loans listed on your credit report to those that the Department of Education indicates you have with them. You can do that by creating an account with studentaid. gov. Private loans are any student loans that you discover on your credit report but which are not listed online.
Can you file bankruptcy on private student loans?
Private student loan bankruptcy was previously only an option if you could demonstrate that your current income prevented you from repaying the debt without suffering undue hardship. However, a number of significant court decisions in recent years have made it possible to discharge private student loans by demonstrating that the loans aren’t protected by the Bankruptcy Code. These decisions permit debtors to avoid applying the totality of the circumstances test, or the more well-known Brunner Test, which originated in the court case Brunner v. New York State. New York State Higher Education Services Corp.
When did private student loans become nondischargeable?
Private student loans didn’t receive the same treatment as federal student loans until 2005, though federal student loans have been non-dischargeable in bankruptcy since 1976. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was passed by Congress in order to make it more difficult for borrowers to file for Chapter 7 bankruptcy and encourage more debtors to file Chapter 13 bankruptcy.
To prevent the bankruptcy discharge of education loans that did not exceed the student’s cost of attendance at specific higher education institutions, Congress amended 11 USC 523(a)(8) as part of the Act. These debts are known as “qualified education loans.”
Related: Can Private Student Loans Be Discharged Due to Disability?
The simplest way to determine what kind of student loans you have is to compare the loans listed on your credit report to those that the Department of Education indicates you have with them. You can do that by creating an account with studentaid. gov. Private loans are any student loans that you discover on your credit report but which are not listed online.
When are education loans made by private lenders dischargeable?
Section 523(a)(8) of the U. S. Bankruptcy Code protects three types of education debt from discharge:
If a loan satisfies one of those three criteria, you can only cancel it if you can demonstrate that doing so would cause undue hardship. Specifically, you’ll have to show two things:
Learn More: How to Prove Undue Hardship for Student Loans
Some private loans are easier to discharge
Some private student loans don’t meet the criteria to be exempt from discharge. Without demonstrating undue hardship, private student loans may be discharged if:
Are private student loans now dischargeable?
You might conclude from recent bankruptcy court decisions reported in the media that private student loans are now dischargeable. That’s not entirely accurate.
Although significant decisions in recent years (see below) have made some education loans from certain private lenders dischargeable in some jurisdictions, this is not the case in all bankruptcy courts nationwide.
Most people who have private lender-made student loans will still need to file a separate bankruptcy case to allow a judge to determine whether they qualify for discharge.
Circuit Courts that have determined that debt from private student loans is discharged include:
Private student loans bankruptcy legislation
Legislation to reinstate the dischargeability of private student loans without requiring the demonstration of undue hardship has been proposed by members of Congress since 2005. To date, no.
If Congress approves any of these, the legislation will be applicable to debtors who filed for bankruptcy after the law was passed. People who have already received a discharge wouldn’t be affected retroactively by it.
Non-bankruptcy solutions for private loans
You don’t have to file for bankruptcy to get out from under your debts. Negotiating a settlement for either a lump sum or regular payments may be possible. Even though settling doesn’t completely eliminate debt, it may be preferable to spending three to five years in a Chapter 13 bankruptcy.
Contact your servicer to learn about other options to reduce the interest rate or payments if bankruptcy or settlement are not viable options. Additionally, if your credit score is high, consider refinancing. If you refinance your student loans, you might be able to get a better interest rate and more flexible repayment options.
Unfortunately, student loan forgiveness programs based on your profession or financial hardship are not offered by private financial institutions. However, many lenders offer loan cancellation in the event that the primary borrower passes away or becomes disabled.
Private student loan bankruptcy is getting easier
The truth is that forgiving private student loans is becoming simpler. But unlike with other consumer debts, it doesn’t happen automatically. Many borrowers will still have to pass additional requirements in order to receive a discharge.
It can be difficult to locate a bankruptcy lawyer or law firm willing to initiate an adversary proceeding. That’s where I come in. I’ve assisted a lot of individuals like you in successfully navigating the bankruptcy process for their private student loans. Call me so we can talk about how I can assist you in doing the same.
FAQ
Are private student loans discharged in Chapter 13?
Bankruptcy under Chapter 13 Your debt will be restructured, and you’ll have to make some payments on it. If you qualify, you may be able to restructure your student loan payments rather than have them forgiven. The court process could take up to six months, and the repayment schedule could take up to five years.
Why are private student loans not dischargeable?
If the following conditions are met: a nonprofit did not support the loan; the loan exceeded your cost of attendance (i.e. e. , educational costs determined by the financial aid office at your school), or The loan did not come with conditions like an ROTC scholarship would.
How do I get rid of private student loans?
You must settle the outstanding balance in full or be eligible for a loan forgiveness program like Public Service Loan Forgiveness or Total and Permanent Disability Discharge in order to get rid of them. Obtaining a copy of a student loan promissory note is explained in more detail.
When did private student loans become non dischargeable?
As a result of Section 439A of the Higher Education Act of 1976, student loans were first made non-dischargeable in bankruptcy in 1976. Section 439A made it unlawful for debtors to discharge student loan debt until five years have passed since the beginning of the repayment period, with the exception of cases of extreme hardship.