student loan debt, Student Loans

A New Loophole for Certain Kinds of Private Student Loans

Student loan debt has traditionally been extremely difficult to discharge in consumer bankruptcy cases. For those consumers struggling with insurmountable student loan debt, the ability to seek a fresh start through a bankruptcy case has been impossible for this reason. Even if they are able to successfully discharge most of their debts, they still walk away with a significant amount of  student loan debt, including both federal and private student loans. A new loophole could change this fact for borrowers who are struggling to pay their private student loan debts.  

A staggering 45 million American consumers owe a collective $1.5 trillion in student loan debt. Over one million borrowers defaulted on their student loan debt annually. The only method available to these borrowers to discharge their loans in bankruptcy is to meet the “undue hardship” test. Unfortunately, courts view this exception very narrowly and not all courts apply the test uniformly.

Essentially, the borrowers need to file a legal action against their student loan service providers under their bankruptcy case to show that they have made long-standing good faith efforts to pay back their loans, but due to undue hardship, they are not able to feasibly pay these loans back in full. The lenders then can present evidence against their case to show why the loans should not be discharged. The process is complicated, lengthy, and expensive, which is why many borrowers avoid it altogether and simply never file for bankruptcy. However, a recent loophole was made available in a court case decided in Colorado that could change this fact for certain private loan borrowers.  

The case comes out of the 10th Circuit, where a Colorado couple was able to have their nearly $200,000 in private student loan debt cancelled without the requirement of meeting the undue hardship case. However, the ruling narrowly focuses on the categorization of their loans. The borrowers, Byron and Laura McDaniels, filed for Chapter 13 bankruptcy, listing their private student loans through Navient Solutions LLC, in the list of debts they requested for discharge. Navient filed a response, saying that their loans could not be dried because they were obligated to repay funds received as an educational benefit.  

The court found that their loans were taken out instead to fund living expenses and not tuition, which meant that the private loans were not received as an educational benefit under the bankruptcy code. Therefore, the McDaniels’ private loans could be discharged because of how they were used.  

While technically this ruling focuses on a rare situation and one classification of loans, the lawyer for the McDaniels said that he believes the ruling had broader implications, showing the courts could be more flexible when determining whether to discharge student loan debt in bankruptcy. 

Student loan reform has been a major issue in the impending presidential election. Many have pushed their congressional representatives to reform how student loan debt is handled in bankruptcy.  The coronavirus (COVID-19) crisis and the financial struggles many Americans have sustained because of statewide shutdowns have made this need even more pressing. Currently, student loans make up the largest category of consumer debt not dischargeable in a bankruptcy case.  

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For borrowers who are struggling with student loan debt, relief options are available.  Many student loan borrowers are unaware that they have rights and repayment options available to them, such as postponement of loan payments, reduction of payments or even a complete discharge of the debt. There are ways to file for bankruptcy with student loan debt.  It is important you contact an experienced Miami bankruptcy attorney who can advise you of all your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.  

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