A bankruptcy filing does not create a “safe harbor” from student loan debt. Although past due tuition owed to an institution is usually dischargeable in bankruptcy, student loans rarely are, particularly when their funding comes from (or is guaranteed by) governmental agencies or non-profit institutions (note: this is the usual type of student loan). However, when the funding comes from private, for-profit lenders there are instances when the student loan, or a portion thereof, can be discharged. A private educational loan is only non-dischargeable if it is a “qualified education loan”, which means that:
The one instance where any type of student loan can be discharged in bankruptcy is if the debtor can establish an “undue hardship”, which in our experience is very difficult to do. To meet this threshold a debtor must establish that if forced to repay the student loan he/she will be unable to:
It should be noted that the legal fees associated with bringing a Complaint in Bankruptcy Court to obtain a Bankruptcy Court Order discharging student loan debt can be a very high, and the Debtor is responsible for their own legal fees, win or lose The lenders in question are well-funded and generally do not roll over and play nice when confronted with a Dischargeability complaint. However, when dealing with private student loans whose proceeds were paid to a non-accredited school it is possible, in certain circumstances, for a prevailing debtor to get their legal fees paid by the lender. This “tactic” would have to be discussed with our firm in great detail before being employed.
When the government is your student loan creditor, it is usually advisable to enter into a repayment arrangement with them. The government has many collection options available to it, all of which can make your life miserable and none of which become barred by the passage of time (i.e. no statute of limitations defense). The following steps may be taken by the government to recover the outstanding balance due:
There are some non-bankruptcy “discharge” options available for federal student loans in certain circumstances, many of which have Cancellation of Debt. “COD”) income tax consequences:
The borrower is currently employed in a public service job and has been so employed while having made 120 monthly payments on an eligible loan that is not in default. This has no COD consequences;