Since 2005, private student loans have enjoyed protection from discharge in bankruptcy unless the borrower can prove "undue hardship," which is a tough burden. Most people just assume that it can't be done, and don't even try to in their bankruptcies. But those that don't could be missing out, because they aren't asking a very important question:
Is It a "Qualified" Student Loan?
Most people don't ask that question, and you don't want to be most people! The word "qualified" is key here because the bankruptcy code states that in order for it to be non-dischargeable absent a showing of "undue hardship," it must be a "qualified education loan . . . incurred by a debtor who is an individual." So, what does "qualified" mean?
The code directs us to the Internal Revenue Code, section 221(d)(1), which states it is a loan that is:
- Incurred solely to pay qualified higher education expenses (i.e. cost of attendance at an eligible educational institution)
- Incurred on behalf of the student, his or her spouse, or any dependent as of the time the loan was taken out
- Attributable to education furnished during a period during which the recipient was an eligible student.
The loan must meet all of these requirements to be "qualified" and have the protection from discharge.
How Do You Show That the Student Loan Is Not Qualified?
There are some very simple questions that you can ask yourself about these loans that can lead to you discharging them in a bankruptcy. They are:
Did I borrow more than I needed? Let's say that the cost of attendance at your school for that year was $50,000. You were able to get grants and federal loans totaling $30,000. Then you took out a private loan for $25,000. Because this tallies to $5,000 more than you needed, the entire loan is dischargeable!
But be careful here. Cost of Attendance can include a lot of things besides tuition, including room and board (even if you live off campus), books and suuplies, and travel expenses to and from the school. Be very careful to calculate this correctly, but if it turns out you ended up borrowing more than you needed, it can mean wiping out all of it.
Was the School Accredited? This is a big one. Many people take out solely private loans because the school is not acccredited, so it does not qualify for federal loans and other assistance. If the answer is no, the loans are dischargeable.
Were You an Eligible Student? In essence, this means that you had received a high school diploma or GED and had the pre-qualifications to attend college. Some schools "overlook" this in order to get you and your money.
Were You a Co-Signer for a Non-Dependent Student? If you cosigned for someone who was not your dependent at the time the loan was taken out, then you can discharge the debt (although the student borrower may not be able to). So if you are the aunt, uncle, cousin, best friend of the student, and said student has a parent or parents supporting him or her, then you're good! You may even be able to do this for graduate or professional school because by that age the student may no longer be your dependent.
Talk to a Bankruptcy Lawyer!
The worst thing you can do is assume it can't be done. There may be ways to challenge the loan, but you really need an experienced bankruptcy attorney by your side to evaluate your case and handle it if you have one.
If you live in Burlington, Camden, Gloucester, Salem, Atlantic, Cape May or Cumberland County, have unaffordable private student loans, unmanageable debt that has you deciding to file bankruptcy, and you are ready to take action, then call my office right away at 856-432-4113 to schedule an appointment. Don't struggle any longer than you have to under the burden of a private student loan!
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