Common wisdom on this topic isn't very wise. Here are the facts.
There’s a big misconception that private student loans can never be discharged in bankruptcy. People have repeated that statement so often they believe it to be a fact. The only problem is it’s not quite true.
Some private student loans are clearly eligible to be wiped away in a consumer bankruptcy. Even in a Chapter 7 bankruptcy, it takes only about 90 days to forgive the debt tax-free.
And while these special rules apply to private student loans that meet some criteria, all private students loans are no longer legally collectible once they have expired under the statute of limitations in your state.
In that case, while they may be listed as a debt on your bankruptcy filing, there isn’t much of a need since the lender can no longer sue you or garnish your wages over those debts. In some states, the statute of limitations is as little as three years. In others it’s 15 years.
But for some private student loan debt you don’t have to wait that long. You don’t even have to wait a week.
Where did you go to school?
If you owe private student loans for a school that was not accredited, your loans can probably be discharged in a Chapter 7 bankruptcy right away. Even some big-time lenders still make private student loans to such unprotected organizations. It’s quite common to find vocational and trade school students with these types of unprotected loans. Flight schools for pilots seem to notoriously be unaccredited. Yet some pilots labor under hundreds of thousands of dollars of unmanageable student loans, incorrectly believing there is no hope for them. You can see some real case studies showing how easily these loans were discharged.
What makes these private student loans so easily dischargeable in bankruptcy is the fact the school was not a “eligible educational institution” or that the loans were for a “qualified higher education expense.”
In order for a loan to be qualified as a private student loan:
“(1) it must have been made under a government or nonprofit student loan program, or (2) it must be a qualified educational loan under section 221(d)(1) of the Internal Revenue Code, for attending an eligible education institution as defined in section 221(d)(2) of the Internal Revenue Code, and incurred for costs of attendance as defined in section 472 of the Higher Education Act.”
As bankruptcy attorney Craig Andresen says, if any of the following applies to you, your loan would be fully dischargeable in bankruptcy:
- If you were not an “eligible student” at the time the private student loan was made to you;
- If the loan was not incurred to pay “qualified education expenses;”
- If the loan was for a school that was not accredited under Title IV of the Higher Education Act.
But the characteristics of a private student loan get even more specific. Just because a school was accredited, they must also have offered Title IV federal loans. Otherwise the private loans may not be protected from discharge in bankruptcy.
Some attorneys have also reported to me other types of entities have been financing services using private student loans. One facility on particular was an in-patient drug treatment facility. Clearly that does not seem to be a protected category for private student loans.
How did you use the loan?
But just because your school meets all the requirements of a Title IV of the Higher Education Act of 1965, that doesn’t mean some or all of your private student loans are not eligible to be eliminate in bankruptcy. If your loans were used for things other than a “qualified higher education expense” the law does not protect those amounts. So if you used your private student loan money for things other than tuition, books, supplies and required equipment, that part of your student loans may be eliminated in bankruptcy today.
Private student loan bankruptcy discharge is one of those issues in the debt world that many just make the wrong assumptions about. It pays to learn more.