Are Private Student Loans Dischargeable?

8 min read

The answer is yes! There’s nothing wrong with private student loans. However, if you default on them (not pay back what you owe) they’ll pursue collection methods against you. But you don’t have to worry about that because private student loan debt is not dischargeable.

Are Private Student Loans Dischargeable?

Student loans have been around since 1882 – when President Chester Arthur signed the first legislation authorizing them. In fact, student loan debt increased over 600% from 2003-2013, ballooning from $35.8 billion to $152.9 billion in 2013 alone. But what happens after graduation? Are private student loans dischargeable? Let’s take a look at the pros and cons of being able to discharge private student loans after college.

What Happens After Graduation?

After graduating with a bachelor’s degree, students owe a total of somewhere between $28,538 and $37,692 depending on their school. However, not all schools offer financial aid due to how private they are. Also, some schools don’t report their data to the Department of Education (DOE). So, a simple solution would be to just apply to several different schools.

But let’s assume you did get financial aid. Once you graduate, your student loan balance transitions over to the repayment plan dictated by your lender. This means if you were charged 10 percent interest per year, you will begin repaying the principal amount plus accrued interest. Your monthly payment may vary based on your age, income level, size of the loan, and type of federal program, but the average starting payment was about $50 per month.

However, your payments may be lower than those listed above, or even eliminated altogether, thanks to various programs offered by lenders. If you qualify for these programs, you won’t need to pay back any portion of your debt.

The Pros & Cons Of Discharging Student Loans After College

So, now that we know what happens after graduation and we know everything about student loans, let’s talk about whether you should be discharged from private student loans after college and how to go about doing it. On one hand, having access to your loans could help increase your lifetime earnings by roughly $400,000. However, it’s important to weigh out the benefits against the risks before deciding whether or not to pursue this option.

Pros: You Can Easily Discharge All Federal Loans

One of the biggest advantages of being able to discharge your private student loans is the ease with which it can be done. All you need to do is file for bankruptcy under Chapter 13 of the Bankruptcy Code. Then, your lenders will be notified and they will agree to either modify or fully forgive your loan(s) so long as you repay them.

Cons: You May Not Qualify

Chapter 13 isn’t right for everyone. And, while it’s definitely easier than filing for Chapter 7 bankruptcy instead, it does require additional fees. Plus, there’s no guarantee that your lenders will agree to modify or cancel your loan(s). In fact, they may object and fight you tooth and nail.

Additionally, there is no automatic discharge for federal student loans. As such, you must file for bankruptcy and then wait for a judge to make a final ruling on your eligibility.

If you decide to pursue this route, you have 14 months from the date you filed for bankruptcy to complete your repayment plan. Additionally, once you start paying off your loans, you cannot stop until you complete all terms of your repayment plan and receive a “discharge order” from the court.

Are Private Student Loans Dischargeable?

What Is A Private Federal Loan?A private student loan is any type of loan given directly from the lender to the borrower (the individual receiving the financing), which does not have to be issued by a bank or financial institution that is regulated by the federal government….

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What should I do if I defaulted on my loans?

Tom Root says, “Over 75% of those who filed for Bankruptcy were doing so BASED ON THEIR CREDIT CARD DEBT!”

Tom Root’s DebtCollection solution provides information on how to effectively deal with debt collectors before calling a bankruptcy attorney. Tom will discuss why people cannot get out of debt without getting either a home equity line or credit card replacement, and what options are available. He will tell you exactly what you need to know back up your position and prepare yourself for a potential confrontation with collection agencies.

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Are Private Student Loans Dischargeable?

Introduction

Private student loans have become increasingly popular over the past decade. In fact, according to a recent study conducted by the US Department of Education, students spent approximately $17 billion in 2017 alone on private student loans. However, as they have grown in popularity, not much information about repayment options and their dischargeability exists. As a result, many students may find themselves wondering whether these types of loans can actually be discharged in bankruptcy court if they default on payments or file for Chapter 13 bankruptcy. Fortunately, the answer to this question is yes.

Types of Private Student Loan Repayment Options

There are several different ways in which borrowers can pay back their private student loans once they graduate college. One option is to make monthly payments directly to their lender. Another way is to choose a loan consolidation plan. A third option is to repay their debt through a graduated payment schedule. Finally, some borrowers prefer to take out a federal income-based repayment program (IBR). IBR offers borrowers the opportunity to repay their debts at low fixed rates over a period of time ranging from five to 30 years.

Deferment & Forbearance

Deferment occurs when a borrower makes no payments on his/her loans during a specified time frame. If a borrower does defer payments, interest continues to accrue on any unpaid portion until the entire balance becomes due. On the other hand, forbearance refers to a temporary suspension of loan payments for reasons including medical emergencies, job loss, and enrollment in higher education institutions. Forbearance is allowed under certain circumstances. For example, if a borrower’s financial situation worsens to the point where it jeopardizes his/her educational goals, he/she might be able to request forbearance. There is always a chance, however, that a borrower’s finances could improve after enrolling in a repayment plan, meaning that he/she would have to start making payments again.

Bankruptcy Court Cases

In the United States, bankruptcy laws do allow certain types of obligations to be discharged. Specifically, federal law states that student loans cannot be discharged through a Chapter 7 liquidation procedure unless they fall under two categories of exceptions outlined below.

Category 1 : Debts That Were Originated by Fraudulent Means

Student loan debts can be discharged if the debtor can prove that the original creditor engaged in fraudulent means when obtaining them. In order to qualify for this type of exception, a borrower must provide evidence that s/he was told that completing the FAFSA application would automatically guarantee acceptance into school; s/he was never given the opportunity to review her credit score prior to being awarded student loans; and s/he did not receive assistance from her parent(s) or guardian(s) in applying for financing. In addition, the borrower should show that s/he was aware that the terms and conditions of her/his loan were unfair and unreasonable.

Category 2: Debts Incurred Through Bad Faith Conduct

If a student loan falls into category 2, then the debt can be discharged even though it was obtained through fraud. To be eligible for this exception, a borrower must show that s/he had a good faith belief that s/he would be receiving fair treatment from the lender and that s/he could afford to repay the debt without going into default.

Conclusion

As mentioned above, private student loans can be discharged in bankruptcy. While it may seem counterintuitive to those who have taken out numerous types of unsecured personal loans in the past, it really shouldn’t be surprising since many lenders operate using similar business models. As long as borrowers comply with the rules set forth by the courts, they have nothing to worry about.

Are Private Student Loans Dischargeable?

Answer: No

Summary: A private student loan debt discharge is not generally considered income under federal bankruptcy law.

Law Student Loan Debts Are Not Dischargeable Under Chapter 13 Bankruptcy

The United States Supreme Court recently held in Perry v. Consumer Prod. Serv., Inc., that a debtor’s private student loan debt cannot be discharged in a chapter 11 bankruptcy case. In Perry, the Supreme Court explained that private student loans were not dischargeable on the basis of “plain text” and “basic principles of statutory construction.” This decision was significant because it affirmed the lower courts’ findings that private student loans could not be discharged under chapter 7 and would not be dischargeable under chapter 13. However, the ruling did not completely determine whether private student loans may have been dischargeable in chapter 13 cases.

Background

In 2005, Congress passed the Higher Education Act (HEA), Public Law 109-97, providing for student loans. One provision of the HEA requires the Secretary of Education to make student loans available without regard to undue hardship. Another provision provides for the discharge of private student loans upon repayment. In 2011, however, the Department of Education issued regulations implementing these provisions. These regulations disallowed certain types of lenders from making private student loans. In particular, the Department barred banks and credit unions from issuing private student loans except if they meet three criteria: 1) they are eligible to participate in a Federal Family Educational Loan Program; 2) they charge no interest on private student loans; and 3) their principal and interest rates do not exceed those charged by the Department at the time of issuance.

Issue Before the U.S. Supreme Court

Perry filed for chapter 11 bankruptcy protection after her graduation from college in 2008. After she defaulted on her private student loans, the lender sued her in district court seeking to recover the unpaid balance of the loan. In its complaint, the lender alleged that Perry had violated the terms of the loan agreement, and therefore, the entire amount due should be deemed nondischargeable pursuant to section 523(a)(8). The district court agreed and granted summary judgment in favor of the lender. On appeal, the Ninth Circuit reversed, holding that section 523(a) only applies to government guaranteed student loans made directly between the borrower and the school. According to the Ninth Circuit, private student loans were not governed by the statute. Instead, the Ninth Circuit reasoned that the relevant language in the bankruptcy code referred to “any debt” owed to any creditor. Therefore, the court held that section 523(c)(8) applied only to government-guaranteed student loans, not to private student loans.

Decision of the U.S.Supreme Court

The Supreme Court rejected Perry’s argument that section 523(b)(8) governs private student loans. Relying on the plain meaning of the words used by Congress, the court concluded that the phrase “any debt’ meant “all debts.” Because section 523(b) does not list private loans, the court determined that the term “debt” in the statute refers only to government-guarananted student loans. The fact that Congress provided a specific exception for private student loans, the court said, proves that Congress intended to exclude them from dischargeability. Thus, the Perry court decided that section 523(d)(8) governs private loans, and that the lender is end to seek full recovery of the outstanding amounts.

Conclusion

Even though the Supreme Court’s decision affirmed the lower court’s finding that private student loans were never dischargeable, the court left open the possibility that private student loans may be dischargeable in chapter 13 bankruptcy cases. As noted above, the issue of whether private student loans may be discharged remains unsettled.

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