The majority of people in Indiana who have thought about declaring bankruptcy likely already know how challenging it is to get student loans erased. Although it is not impossible, debtors normally need to pass the Brunner test, which establishes that repaying the student loans will put them in an unreasonably difficult position. Unfortunately, it is very challenging to demonstrate an undue burden in the majority of jurisdictions. As a result, the majority of debtors who file for Chapter 7 bankruptcy do not get their college loans dismissed. 

How do bankruptcy courts handle private student loans, however? Are private student loans treated differently by bankruptcy courts? In this article, we discuss if it’s possible to discharge a private student loan in bankruptcy. 

Understanding Federal Loans and Private Loans

Because federal student loans provide flexible, income-based repayment plans, deferments, forbearances, and loan forgiveness, they are less likely to be discharged in bankruptcy. These factors make it difficult for borrowers of student loans to demonstrate an unreasonable hardship.

But unlike the Department of Education, private student loan lenders don’t provide the same kinds of advantages. As a result, it’s frequently easier to declare bankruptcy and obtain a discharge for private student loans. In addition, new bankruptcy laws resulting from court decisions and proposed legislation may soon make it possible for borrowers to cancel their private loans without having to go through any additional hurdles.

Private student loans weren’t treated the same way as federal student loans until 2005, even though federal debts haven’t been dischargeable in bankruptcy since 1976. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was passed by Congress to make it more complicated for borrowers to file for Chapter 7 bankruptcy and encourage more debtors to file for Chapter 13.

To prevent the bankruptcy discharge of school loans that did not exceed the student’s cost of attendance at specific higher education institutions, Congress changed 11 USC 523(a)(8) as part of the Act. These kinds of debts are called Qualified Education Loans. 

Different Types of Dischargeable Loans 

Some private loans for educational purposes can be discharged in a normal bankruptcy proceeding, just like most other consumer debts. For instance, a variety of student loan types, like most other forms of unsecured consumer debt, are dischargeable in bankruptcy. These loans for educational costs are exempt from the stricter requirements and additional steps.

These loans could include:

• Loans where the amount was higher than the cost of attendance (such as tuition, books, room and board), which can occur when a loan is paid directly to a consumer.
• Loans to pay for education at places that are not eligible for Title IV funding such as unaccredited colleges, a school in a foreign country, or unaccredited training and trade certificate programs.
• Loans made to cover fees and living expenses incurred while studying for the bar exam or other professional exams.
• Loans made to cover fees, living expenses, and moving costs associated with medical or dental residency.
• Loans to a student attending school less than half-time.

Common Reasons Private Loans May Be Discharged

Section 523(a)(8) of the U.S. Bankruptcy Code protects three types of education debt from discharge:

• Loans and benefit overpayments backed by the federal government or a nonprofit.
• Qualified private educational loans.
• Obligations to repay funds received as an educational benefit, scholarship, or stipend.

If a loan satisfies one of those three criteria, you can only discharge it if you can demonstrate that doing so would cause undue hardship. You must specifically demonstrate two things:

• You made a good faith effort to repay the debt.
• Your current and future financial situation doesn’t allow you to maintain a minimal standard of living for yourself and your dependents while making student loan payments throughout the repayment period.

Private student loans may be discharged without proving undue hardship if:

• A nonprofit did not back the loan.
• The loan exceeded your cost of attendance (i.e., education expenses set by your school’s financial aid office).
• The loan was not a conditional grant of money like an ROTC scholarship.

Contact a Student Loan Attorney Today

Our student loan lawyers can assist you with other student loan relief choices and programs as well as the process of student loan rehabilitation. We assist borrowers of student loans in moving on with their lives while also enhancing their credit histories and financial circumstances.

If you’re ready to receive assistance with your student loans or if you want to learn more about how student loan attorneys can help, call us at 317-759-1483. You can also click here to schedule a free, no-risk consultation with one of our attorneys to review your situation.