Educational Loans Discharge

  • Bankruptcy Law

Can Educational Loans be Discharged in Bankruptcy?

Bankruptcy is the best legal recourse available to people to get rid of unpaid dues accumulated due to miscalculated financial risks, heavy medical bills or long credit card bills. However, certain debts such as spousal and child support, government taxes and educational loans are not discharged even post-bankruptcy. Getting student loans written off during bankruptcy is extremely difficult, though not impossible, say Dallas based bankruptcy lawyers Recovery Law Group. By proving “undue hardship”, which incidentally is very difficult, one can get them cleared, however, the standards set by the court are extremely difficult to meet. According to the court set requirements, a person trying to get education loan discharged off needs to prove that he/she has endured more hardships than any average person.

Though it is not necessary that every student loan will be discharged, you can always try if you can qualify for the same. For students who are older, it might be relatively easy to prove “undue hardship” since it is slightly more difficult to find a good paying job as you age; thus paying off debts and living a debt free life might become tricky. However, not all educational debts require the standard of “undue hardship” to be able to get discharged; they can be discharged like most debts post-bankruptcy.

How to distinguish educational debts which can be discharged without the “undue hardship” standard?

According to the Federal Bankruptcy Court section titled “Exceptions to discharge”, subsection 523(a)(8) which describes educational debts that require “undue hardship” for discharge, there are 2 main parts:

  1. Loans and overpayments “made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or non-profit institution.” In this, a large portion of all federal and state insured student loans are covered. Any loan funded through non-profit educational institutes is also covered here. To get these loans discharged you need to show “undue hardship”.
  2. This section deals with those loans which can be discharged without proving “undue hardship”. Here “qualified educational loan[s] as defined in section 221(d)(1) of the Internal Revenue Code . . . .” debts are included.

Since unless the law states so, a debt cannot be discharged; educational loans which are not government guaranteed or funded by a non-profit and are not a “qualified educational loan” cannot be discharged without proving that you are undergoing “undue hardship”. It is therefore important to know about “qualified educational loan” so that you can discern whether they can be discharged without “undue hardship” or not. Three main types of debts which do not qualify as “qualified educational loan” emphasize on:

  • Type of educational institute attended
  • Timing of loan
  • Expense type for which debt was acquired

Identifying Expenses which can Disqualify Debts & Make them Easily Dischargeable

For a debt to not be a “qualified educational loan”, and avoiding the “undue hardship” clause, it should not be “incurred solely to pay qualified higher education expenses” as per Internal Revenue Code’s Section 221(d)(1). In layman terms, a mixed-use debt which is partly used to fund expenses related to education and partly for an unrelated purpose can be discharged without crossing the “undue hardship” hurdle. Student loans, in general, have contracts that ask you to declare that the loan grant is being used for educational purposes only. However, private loans can be used to fund not only the cost of education but also can be used elsewhere and thus can be completely discharged.

Important Points to Remember while Considering the Discharge of Educational Debts

There are certain points to be kept in mind regarding the discharge of educational debts like the timing and the type of the educational institute. Here are a few points to remember:

  • If you incurred the debts at a point of time when you were not an eligible student, the debt can be discharged without “undue hardship”. In case you applied for a course, for which you weren’t eligible, the debts can be easily discharged.
  • For an eligible student, you should be enrolled for at least half-time in a degree or certificate course. In case you have taken any educational debts when you were ineligible, the debts are dischargeable.
  • In case you are not studying at an “eligible educational institution”, the educational debt is not a qualified one. Many educational institutes are eligible, though not all of them. Some of the ineligible educational institutes (both big and small) have been functioning from time to time, with many going out of business too. Any debt incurred thanks to them can be discharged without “undue hardship”.

It is important to ask bankruptcy lawyers, whether the educational institute you attended is an eligible one or not. To know more about getting educational debts discharged you can consult bankruptcy attorneys at 888-297-6023.