Getting a college degree is almost as mandatory as earning a high school diploma in today’s world, but the costs of higher education require millions of Americans to take out student loans to pay for this endeavor. Depending on how many degrees a person chooses to earn, and the school attended, this debt can exceed $100,000, an amount few have any realistic ability of paying. Student loan debt alone can drive a person to seek Chapter 7 bankruptcy, but Congress seems increasingly bent on effectively taking away a debtor’s ability to discharge this obligation, leaving borrowers with few options outside of default, which brings its own set of consequences. Even those lucky few who have a chance at using bankruptcy to relieve student loan debt face obstacles from banks continuing to pursue collection even after the obligation to pay the debt was legally extinguished.
Wells Fargo may be subject to penalties for violations of bankruptcy law for failing to recognize discharged debt. Though the loans were extended for educational purposes, they did not qualify as student loans under bankruptcy rules, and thus, did not survive the bankruptcy petition. A discussion of the general rule about student loan discharge in bankruptcy, and which education-related loans fall outside those captured in the discharge exception for student loans, will follow below.
Rules on Student Loans in Bankruptcy
The underlying purpose of Chapter 7 bankruptcy is to receive relief from a debt obligation through the discharge of certain outstanding financial commitments. However, an exception to discharge is made for education-related loans issued through both the government and the private financial institutions. These loans survive bankruptcy, and lenders retain full rights to pursue all legally-authorized collection methods to secure payment. Typically, the only way borrowers can receive bankruptcy relief for student loan debt is to prove that paying this obligation would impose an undue hardship. Some courts are willing to discharge a portion of student loan debt based upon undue hardship, while others take an all or nothing approach, and will only discharge student loan debt entirely or not at all. Essentially, debtors must prove that their income does not allow for paying the student loan and also meeting minimal requirements for basic necessities, and this situation is expected to last for most of the loan repayment period, despite good faith efforts to repay the debt. Note that, based on a decision from the Seventh Circuit in 2013, debtors do not have to apply for federal repayment plans to satisfy the good faith requirement, but this bar to discharge is still quite high.
Education-Related Loans that May be Dischargeable or Cleared
Debtors who obtained loans from profit-based universities or trade or vocational schools may have an easier time proving a loan should not qualify as an educational loan under bankruptcy law, and therefore, would be dischargeable. In order for a loan to qualify as an educational loan for student loan purposes, the school must be accredited and provide for legitimate educational expenses. Some banks present certain loans as tangentially related to education, but, in reality, are just private loans, which would fall outside the legal definition. Further, some lenders offer loans for trade and for-profit schools without verifying they are authorized to accept federally-funded student loans, or even if the student is actually enrolled in the school. Finally, funds loaned in excess of the cost of attending the school are arguably not providing an educational benefit, and therefore, should be included with debt that is discharged in bankruptcy.
Talk to a Bankruptcy Attorney
Facing overwhelming debt is a serious situation that cannot be ignored. Stop harassment from creditors by talking with an experienced bankruptcy attorney about your options from getting out from untenable amounts of debt. Christopher L. Arrington, P.C. helps clients get the Chapter 7 bankruptcy relief they need to get a fresh financial start. Contact the Danville office to schedule an appointment.