Are Private Student Loans Dischargeable in Bankruptcy?

Until very recently the answer was no.  At least not without a showing of undue hardship.  Which as you may know is very difficult to prove.  However a new line of cases is beginning to emerge that will discharge private student loans.  I will state that again, private student loans may soon be dischargeable in Colorado. **Caveat – See below

First, a bit of background.  Prior to 2005 private student loans were dischargeable.  When the Bankruptcy Code was amended in 2005, language was added to the bankruptcy code seemingly to end that for all time, to wit – “obligations to repay funds received as an educational benefit, scholarship or stipend”.  11 U.S.C. 523(a)(8).  Indeed a number of cases held that private student loans qualified as an “educational benefit” and therefore were not dischargeable.  This is no surprise given that every action of Congress over the past 40 years on the subject has been to broaden the scope of student loan non-dischargeability.

Case after case seemingly affirmed this intent after the 2005 amendments.  See In re Carrow, finding that the debtor failed to establish that the debt to the [private lender] is not an obligation to repay funds as an ‘educational benefit.’”  In re Carow), No. 10-7011, 2011 WL 802847, at *4, 2011 Bankr. LEXIS 823, at *10 (Bankr.D.N.D. Mar. 2, 2011).  See In re Brown which stated which concluded the bankruptcy code should be interpreted broadly so as to except private student loans from the bankruptcy discharge.  

However a recent case in Colorado has seemingly joined the minority position that such broad interpretation is simply incorrect.  The court in In re Patterson  agreed with the minority that to read the first part of the sentence “obligations to repay funds received as an educational benefit” would make the rest of the sentence meaningless.  This section of the statute was designed by congress to except from discharge grants, scholarships, and other similar programs. Essentially, the court held the private student loans in that case were dischargeable.  Moreover the bankruptcy court also permitted the case to proceed so that the debtor could potentially sue the student loan company for improperly collecting on student loans that were indeed discharged!

The student loan servicer appealed.

Unlike normal appeals from the bankruptcy court which go either to the federal district court or the Bankruptcy Appellate Panel, this case was certified directly to the 10th Circuit Court of Appeals.  As of the date of this article it is currently pending.

Needless to say, if the 10th Circuit affirms the bankruptcy court’s decision then the vast majority of private student loans will be dischargeable.  What’s more, depending on the circumstances, for people who have already filed for bankruptcy, but have kept paying their private student loans (assuming they were not discharged) may be entitled to damages.  

At Cohen & Cohen, P.C., we believe this decision goes a long way towards helping to remedy the foolishness of Congress when making student loans non-dischargeable.  What was once a laudable objective, to make college more accessible, has now turned into a slush fund of free money, with no natural market check (i.e. no discharge in bankruptcy), given to young inexperienced individuals, to spend freely on higher “education”, only to then later realize the consequences and be stuck in debt forever.  

If you believe you have student loans that qualify for discharge call us today to discuss.

*Editors Note – we will continue to monitor this case and try to update as things progress.  However we are very busy. We encourage the reader to do their own research and call us if you have any questions. Please ensure that you retain a law firm with experience in bankruptcy litigation and appeals if you go down this road.  This is complicated stuff.

** The caveat referenced above deals with 11 U.S.C. 523(a)(8)(B).  Essentially a if a private loan is qualified under the IRS guidlines, the above doesn’t apply, its still non-dischargeable.

About the Author: Robertson Cohen

Rob Cohen is a Managing Partner of Cohen & Cohen, P.C., serving clients in Colorado and Wyoming. He’s a Chapter 7 Bankruptcy Panel Trustee, certified mediator, and has administered over 8,000 Chapter 7 bankruptcy estates.

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