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Can Private Student Loans Be Discharged through Bankruptcy?

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Most Indiana residents who have considered filing for personal bankruptcy may know that it is very difficult to have student loans discharged. While it is not impossible to have student loans discharged in a Chapter 7 bankruptcy, debtors typically must pass a test known as the Brunner test, which requires the debtor to show that repaying the student loans would constitute an undue hardship. In most jurisdictions, according to a U.S. News & World Report article, proving an undue hardship is extremely difficult. As such, most debtors who do file for Chapter 7 bankruptcy do not end up having their student loans discharged.

But do bankruptcy courts treat private student loans differently? According to an article in the Huffington Post, depending upon the details of your private loan, it may be more easy to discharge in a Chapter 7 bankruptcy than you think.

Learning More About Private Student Loan Debt

Before we explain how you might be able to discharge your private student loans more easily than federal student loans, it is important to understand how private student loans have become problematic for debtors in Indiana and throughout the country. As a recent report from NPR explains, private student loans are neither guaranteed nor subsidized by the federal government as federal student loans are. As such, private student loans typically have much higher interest rates and limited options for repayment. Indeed, repayment often cannot be based on a borrower’s income, as can repayment of federal student loans.

As of the end of 2016, the total private student loan debt in the country totaled $108 billion. When compared with the total amount of all student loan debt in the U.S.—about $1.4 trillion—private student loan debt makes up a relatively small portion of the debt total. Why is it such a significant topic, then?

Many private student loans have been handled poorly, and in some cases have resulted in loan practices similar to those associated with subprime mortgages. In other words, a lot of private student loan borrowers may have gotten a bad deal. Last month, The New York Times reported that about $5 billion in private student loan debt could be erased due to poor recordkeeping. But if your private student loan debt cannot be forgiven in this manner, is it possible to have it discharged through consumer bankruptcy?

Consumer Bankruptcy and the Classification of Private Student Loans

In order for a debtor to be required to meet the Brunner test (or another test used for determining the dischargeability of student loans), the loans must be from an “eligible educational institution,” and they must be classified as a “qualified education loan” according to the Internal Revenue Code.

As it turns out, a lot of students borrowed private student loans to attend educational programs that are not on the Department of Education’s list of qualifying institutions, according to the Huffington Post article. For instance, certain for-profit institutions might not be listed on the Department of Education’s list even though an individual borrowed the loan to take a class or classes at that for-profit institution. In such cases, a bankruptcy court might treat this loan as any other consumer loan, making it easier to obtain a discharge in a Chapter 7 bankruptcy case.

Contact an Indiana Bankruptcy Lawyer

In the event that you borrowed private student loans and are considering bankruptcy, it may be easier than you think to seek a discharge of your student loan balance. An experienced bankruptcy attorney in Indiana can help. Contact Whitten & Whitten to learn more about our services.

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