Can Student Loans Be Discharged in Bankruptcy?

Can student loans be discharged in bankruptcy? It has been a long-held myth that student loans cannot be discharged in bankruptcy. This is not true. In fact, student loans can be discharged in bankruptcy. The Department of Education has taken important steps in order to make bankruptcy relief available to federal student loan borrowers. Private student loan borrowers must also be able to receive the bankruptcy relief provided by the Bankruptcy Code. This relief should be honored by loan owners, creditors, debt collectors, and lenders.

Education Loans Can Be Discharged in Bankruptcy

What’s behind the belief that student loans can’t be discharged in bankruptcy? The Bankruptcy Code makes it more difficult to discharge student loans compared to other types of unsecured credit. It also requires an additional step (an “adversary proceeding” or a lawsuit inside the bankruptcy) and a tougher test. Some borrowers might not be aware that discharge can still occur even with the extra step and standard.

Furthermore, it is important to clarify that certain loans that borrowers may consider as “private student loans” are not subject to these extra steps. Some private educational loans can be discharged through a bankruptcy proceeding, similar to other types of consumer debts.

As an example, many types of student loans are dischargeable through bankruptcy just like other types of consumer debt. These loans are not subjected to the extra step and more challenging standards. These loans may include:

Loans that are not eligible for Title IV funds, such as unaccredited colleges, schools abroad, or non-accredited trade and training certificate programs.
Loans that are used to cover fees and living costs incurred during the study period for the bar exam or other professional exams.
When the loan amount may exceed the actual cost of attending school, including expenses such as tuition and books.
Loans used to cover fees, living costs, and moving expenses associated with medical or dental residencies.
Loans to a student attending school less than half-time

Troubling Consumer Accounts of Industry Practices Regarding Bankruptcy Discharges

These intricacies may pose challenges for the average consumer, but loan owners, lenders, and servicers must incorporate them into their policies and procedures. Over the years, the CFPB has consistently highlighted that student loan borrowers heavily rely on their services to receive timely and accurate information about their loans. This encompasses understanding the law’s protections when borrowers face difficulties repaying their loans.

Regrettably, complaints lodged with the CFPB indicate that these companies may be misleading borrowers regarding the protections offered through bankruptcy—or worse, attempting to collect debts already discharged by a court.

Complaints That Discharge Orders Are Being Violated

Consumer complaints have brought to light significant concerns regarding student loan companies disregarding discharge orders, thereby engaging in illegal collection practices after borrowers have undergone bankruptcy.

One consumer shares their experience:

“I have repeatedly asserted that the [Direct to Consumer XYZ] loan was discharged in my Chapter 7 bankruptcy (see attached). However, they have persisted in collecting monthly payments under the guise of a ‘charge-off’ and have consistently reported my account as late, despite my adherence to the agreed-upon monthly payments. In recent instances, it has been determined that [Direct to Consumer XYZ] loans are indeed dischargeable.”

Another consumer wrote:

“I filed for Chapter 7 bankruptcy, which was satisfactorily discharged. Similarly, this year, my Chapter 13 bankruptcy was also discharged successfully. I had a non-traditional student loan called a [Direct to Consumer ABC] loan, specifically designed for students to use as they saw fit. As a single mother, I utilized this loan to cover bills while being a full-time student with a part-time job.

During my research, I discovered multiple sources, including past Google searches, indicating that [Direct Consumer] loans were not classified as student loans. Furthermore, these loans are fully discharged in bankruptcy. This issue should have been resolved after completing my Chapter 7 bankruptcy. However, the [Direct to Consumer] loan was included in my Chapter 13 bankruptcy, and they received a payment. Despite providing them with all the necessary information, they continue to report my account as charged off, derogatory, and in the process of being sent to collections.”

It is important to note that student loan companies are prohibited from collecting debts from individuals who no longer owe them. As mentioned earlier, certain education loans can be discharged in bankruptcy without the need to meet a higher standard or file an adversary proceeding. Collecting debts that have been discharged in bankruptcy not only violates the Consumer Financial Protection Act, which prohibits unfair, deceptive, and abusive practices but also goes against orders issued by United States bankruptcy courts.

These complaints raise significant concerns regarding the practices and treatment of bankruptcy discharges by private student loan holders, lenders, collectors, and servicers.

Has Your Loan Been Discharged?

Consider the following questions if you have had a bankruptcy and still have private student loans that are being collected.

You may be able to discharge your loan if you took it out for more than just the cost of attending (tuition and books). Your loan might have been discharged if it exceeded the cost of attendance.
You may have been able to discharge your loan if you took it out for an education in an unaccredited institution, a school located abroad, or a non-accredited trade and training certificate program. If this applies to you, your loan might have been discharged.
Did you attend school less than half-time when you took out your loan? If that is the case, your loan might have been discharged.
You may have taken out a loan to cover fees or costs related to studying for an exam. This could include the costs of the board exam or the fees, moving expenses, and living expenses associated with a residency in medicine or dentistry. If so, your loan might have been discharged.

Consider the following steps if you believe you’ve been charged for a loan that has been discharged during bankruptcy:

Document your bills and the amount you have paid.
Find and save all documents you may have regarding the loan. This includes your promissory notes and any communications from the lender or servicer. Additionally, keep any bankruptcy documents that list the debt and discharge order.
You can also send a complaint to the CFPB. Attach any relevant information you have about your loan to support your complaint.

Bruner Wright P.A. Can Help with Bankruptcy and Student Loans

Don’t let the weight of student loan debt hold you back from achieving your financial goals. Take the first step towards a brighter future by contacting Bruner Wright P.A. today. Our compassionate Jacksonville bankruptcy attorneys are ready to guide you through the complexities of bankruptcy and student loan relief, empowering you to regain control of your financial well-being. Let us be your trusted partner on the path to financial freedom.

Can Student Loans Be Discharged in Bankruptcy?