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Can Student Loan Debt Be Discharged in Bankruptcy?

Posted on in Arlington Heights Bankruptcy Lawyer
Can Student Loan Debt Be Discharged in Bankruptcy?

Student debt cannot easily be discharged through bankruptcy like other types of debt, such as credit card and medical debt. This is because of 1970s legislation that arose over fears of federal student loan borrowers taking advantage of their ability to discharge their debt through bankruptcy. The legislation was extended to include private student loans in 2005. Now, individuals with substantial amounts of student debt often feel trapped by their debt because of the assumption that it cannot be discharged through bankruptcy.

The truth is that it can be discharged through bankruptcy if it creates an “undue hardship” on the indebted individual. This can be difficult to demonstrate. To combat this issue, some bankruptcy lawyers are now using a new strategy to help their clients discharge their debt.

How Debt is Classified Determines Whether it Can be Discharged

For a student loan to be non-dischargeable in bankruptcy, it must be a qualified student loan that meets certain criteria. According to one of the bankruptcy lawyers now challenging the assumption that student loans cannot be discharged through bankruptcy, many student loans are erroneously classified as non-dischargeable because borrowers and their lawyers do not fully understand the criteria that determines whether a specific debt may be discharged. Student loan debt cannot be discharged through bankruptcy if it meets one or more of the following criteria:

  • If the loan is a federal loan;
  • If the debt is for a program funded partially or entirely by a nonprofit institution. For example, loans made by most – but not all – universities and educational programs fall into this category. If a loan was issued by a for-profit institution, such as the now-defunct Corinthian Colleges, it may be dischargeable;
  • If the loan is a qualified educational loan, which means that it was made for specific expenses like tuition and school supplies; and
  • If the funds were received as an “educational benefit.” This last point is one that certain lawyers are specifically challenging now. Although this can be defined as a private loan, it may also be interpreted as scholarships or grants that carry certain obligations for students. Using this logic, one may argue that private loans for more than a student's actual educational expenses can be discharged if the student did not end up attending or completing his or her program.

Reclassifying student loan debt may be a way to make it dischargeable, or even simply more manageable, for an individual struggling with his or her debt load. If you are facing a high level of student debt, do something about it. Explore your options and educate yourself about potentially discharging it through bankruptcy.

Work with an Experienced Arlington Heights Bankruptcy Lawyer

If you are struggling with a level of personal debt that you feel you cannot realistically pay back, consider working with an experienced bankruptcy lawyer to discharge the debt through bankruptcy. Contact our team of bankruptcy lawyers at Newland & Newland, LLP today to set up your initial consultation in our office. We serve clients in the Arlington Heights, Palatine, Rolling Meadows, Libertyville, Mundelein, Buffalo Grove, Schaumburg, Elk Grove, and Itasca areas.

(image courtesy of Faustin Tuyambaze)

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