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So Let’s Talk Private Student Loans!!

September 18, 2012

The instant you realize that you are financially overextended the walls of your reality start closing in fast. The financial burdens begin to dramatically take effect and the weight of the debt and the pressures associated with creditor collection efforts start taking its toll on you psychologically, mentally and oftentimes physically. So whether you seek information out via the internet, talking to friends and family, or seeking legal advice…invariably you start exploring your options.

Usually no matter what age you are or your position in life, a portion of an individual’s debt structure includes student loans. Whether you are the student, perhaps a friend which is the cosigner of a student, or in all likelihood a parent of a student, student loans are customarily included within an individual’s debt portfolio.

When I meet potential clients to discuss their financial issues and explore bankruptcy relief as an option, before I begin to discuss the topic of student loans, the person I am meeting with will say, “Yes, I know student loans are not dischargeable in bankruptcy, BUT I have a private student loan!”. I nod in agreement because generally, unless there is a finding of undue hardship, federal student loans are not subject to a bankruptcy discharge. These loans are customarily recognized as Stafford, Perkins, FFEL and Plus loans. To contrast those with private student loans which are commonly issued by banks, credit unions, and schools.

However what most people do not know is that in 2005, Congress amended the exception to discharge statute with respect to student loans. Not only does the statute speak to loans which are guaranteed by the government, the language was broadened to include an educational loan, which is defined as a “qualified education loan as defined by section 221(d)(1) of the Internal Revenue Code. “ So if you have a private student loan, what does this mean to you? Well, your private loan, along with your federal loans, may survive a bankruptcy discharge.

So how does one tell if their private loan is one that will survive a discharge? Each loan must be reviewed on a case by case basis. A detailed analysis should be performed surrounding the circumstances of each loan, to determine whether or not the loan satisfies the elements of the statute to be considered a qualified education loan. Examples of a few most commonly litigated components of the statute are as follows:

  1. was the debt incurred “by a debtor who is an individual”
  2. whether the debt was incurred soley to pay “qualified higher education expenses”
  3. was the debtor an “eligible student”

If you have a private student loan, before you seek legal advice as to whether a specific loan is subject to a bankruptcy discharge, be prepared to answer some detailed questions. At a minimum you need to know the college you attended when the loan was issued, what expenses the loan relates, your enrollment status at the college at the time the loan was issued, and how and when the loan was applied to school expenses. If you are a parent of a student or a consigner of a private loan, these topics need to be explored with the student prior to a consultation to determine your rights are under the current bankruptcy law.