“By failing to prepare, you are preparing to fail.” ~~ Benjamin Franklin
Some Private Student Loans Eligible for Automatic Discharge in Bankruptcy
What’s in a name? Just because your private student loan uses the term “student loan” doesn’t mean it is one. At least for purposes of the U.S. Bankruptcy Code, a student loan must be from an “eligible educational institution“ to be considered nondischargeable. If it’s not, getting rid of it in a bankruptcy can be easier than it looks. Jennifer Lynn Davidson knows this better than most.
She borrowed approximately $20,000 from Sallie Mae to attend CTI”s Co-Active Coach Training Program, signing promissory notes describing themselves as “student loans.” She was troubled by instructors spending a significant amount of time trying to enroll students in further classes. but succumbed to the pressure, and signed up for another CTI program. While attending the first session, Ms. Davidson found herself being berated by the “instructor” who got in her face and swore at her as part of the “training.” The final straw was when the instructor announced there would be a clothing optional pool party after the close of the program that day. She decided to leave and made arrangements to return home the next day. She immediately contacted CTI, notifying them of her withdrawal and requesting a refund of the unused portion of her fees. The problem of course was that she had signed approximately $20,000 of what Sallie Mae believed to be “student loans.”
Labels can be deceiving, however, as a student loan must meet specific bankruptcy code requirements to avoid being automatically discharged in bankruptcy like a credit card. The U.S. Bankruptcy Codestates a private student loan must be a
To be a “qualified education loan“ under the Internal Revenue Code, a loan must be from an “eligible educational institution.” The Department of Education publishes a list each year of qualifying schools. If an institution is not on this list, the loan is not considered a “student loan” under the Bankruptcy Code, and, therefore, can be automatically discharged in bankruptcy. That is ultimately what Sallie Mae agreed to do, permitting Ms. Davidson to avoid the more difficult dispute over whether her loans posed an “undue hardship.” So how can you find out whether your student loan is in fact from a qualified educational institution?
(1) First of all, be sure you know what type of loan you have. This argument only works for private student loans. Just because your loan is with Sallie Mae or Navient doesn’t tell you whether it’s a federal or private loan. Sallie Mae can be either. If you have any doubt, go to the National Student Loan Data System, and see if your loan is there. If it’s not, it’s almost certain to be a private student loan but check your credit report if you’re still unsure.
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