Are Student Loans Dischargeable in Bankruptcy?
For many years conventional wisdom has been that student loans are not eligible for discharge in bankruptcy filings. However, as we learn more about bankruptcy and student loans, we have found recent court rulings which may be opening the door for some borrowers to wipe out their student loan debt, permanently.
Under existing federal laws, Congress exempted federal student loans from discharge through bankruptcy decades ago and in 2005 extended that exemption to also include private student loans. For years, borrowers and their attorneys tried to have student loan debt wiped away typically argued it was imposing an undue hardship on the borrower — a carve out in the law that made the debt dischargeable but was a notoriously hard standard for borrowers to meet.
Hardship Bankruptcy Discharges Are Rare
How hard is it? As an example, the Department of Education contested the case of a grandmother with $73,000 in student debt, working over 50-hours a week at two jobs to support herself and her autistic grandson, saying she exaggerated her food budget because she accepted food from a pantry that feed the poor and then contested her medical expenses because she did not produce receipts.
For a student loan to be considered non-dischargeable in bankruptcy court, it needs to fit into at least one of four categories:
- A loan from the government
- A loan from a nonprofit organization
- Any other type of loan for qualified educational expenses
- An obligation to receive funds as an educational benefit, stipend, or scholarship.
But in recent cases attorneys have argued their clients did not fit into those four categories. In some instances, the loans received were not certified to pay for the cost of attendance and the money went directly into personal bank accounts and not those of the educational facility. In other cases, the loans were used for non-accredited programs like culinary courses, coding bootcamps or other career training programs at non-degree granting schools.
Court Rulings Are Changing
And now appeals courts are starting to agree with those determinations. In one case Hilal Homaidan filed suit against student loan processor Navient, alleging the company illegally collected on $12,567 in private loans borrowed from Sallie Mae, Navient’s corporate predecessor, after he had filed for bankruptcy.
The money was not used to cover the cost of attendance and went directly to Homaidan’s bank account instead of being processed through the school’s financial services office. His bankruptcy lawyers argued the loans fell outside the four defined categories and consequently were eligible for discharge and the court agreed. So far, three different appeals courts have reached similar conclusions.
While the ruling is a win, Navient claims the grounds are extremely narrow and only applies to a small group of borrowers.
However, a recent report authored by Pamela Foohey of Yeshiva University’s Benjamin N. Cardozo School of Law, Aaron Ament, and Daniel Zible from the National Student Legal Defense Network, states the rulings could impact more than 2 million borrowers owing as much as 50 billion dollars.
The Push for More Leniency in Discharging Student Loan Debt in Bankruptcy
Bankruptcy advocates have started urging the Department of Education to implement lenient policies for student loan borrowers trying to discharge debts in bankruptcy because of undue hardship and to create guidelines to decide when and when not to contest discharge filings. For instance, the Department might decide not to contest the discharge of student debt if Social Security benefits account for at least 50% of a filer’s income.
One thing is certain, legal rules on student loan bankruptcies are changing. The bankruptcy legal team at RJS LAW is monitoring the shifting case law. If you are burdened by high student loan debt and are considering bankruptcy as a possible option, call us today for a free confidential case evaluation at (619)-595-1655. Our experienced Bankruptcy attorneys will review your specific issues to determine if these changes may help you discharge your student loan debt as well as other available options.