Bankruptcy discharge: private student loans can be wiped out in some cases

Many people are under the incorrect belief that student loans can’t be wiped out in bankruptcy. However, there are at least two ways to get rid of student loans in a bankruptcy case.

The first is to show the court that the loan would cause “undue hardship” and so based on that borrower’s specific situation, the loan should be wiped out. We discuss that in another article. The second is to prove that a particular loan does not meet the legal definition of “educational loan” under the Bankruptcy Code and therefore is just an ordinary loan that can be wiped out in bankruptcy.

There are two “exceptions to discharge” that may prevent student loans from being wiped out in bankruptcy.

  1. An educational 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

  2. 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

Governmental unit or nonprofit institution

This exception covers federal and state loans. It also covers loans “made under any program funded in whole or in part by a nonprofit institution.” This sentence in the bankruptcy law caused a whole bunch of student lenders to use nonprofits just for the purpose of funding/guaranteeing their loans. In the paperwork, you may see the name of a nonprofit like The Education Resources Institute (TERI). We believe that many of these loans were not meaningfully funded by nonprofits, but instead the lender “rented” the nonprofit’s name just to avoid the loans being dischargeable in bankruptcy. This is one factor we’ll look at if we represent you in your student loan bankruptcy case.

Qualified education loan

A qualified education loan is a very complex definition that requires looking at a handful of different federal laws, but basically the loan had to be made to an eligible student (half-time or more), at an accredited school, and the loan may not have been for more than the cost of attendance at the school, and solely for educational expenses.

How to make your case

Although the two definitions above make the majority of student loans non-dischargeable in bankruptcy, we believe that a lot of loans don’t meet either definition. You can make your case either by filing an “adversary proceeding” in your bankruptcy case, or by using these arguments as a defense to a student loan collection lawsuit after you have filed bankruptcy. We are one of the only law firms in Minnesota that handles student loan discharge cases, and our prices begin at $5,000. Get in touch if you have questions.