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  1. #1
    Join Date
    Jun 2011

    Question Discharge of a Private Student Loan in Chapter 7 (Not a Federally Backed Loan)

    My question involves bankruptcy in the state of: California.

    I have Tuition Answer loans from Sallie Mae, a form of uncertified private student loan with no federal backing, and at a balance and interest rate that is impossible for me to ever pay off and cover living expenses (even with it discharged there would still be 50k + 80k (my wife) in non-discargable federal loans, but there are programs to limit the payments based on income). Thus, I am investigating bankruptcy. I have compiled some information which seems to indicate that discharge of this loan may be possible (it's a complex affair to challenge it; most lawyers won't even consider discussing it).

    The loan funding source is critical to its legal standing. From the document: "", it states "Examples of privately funded loans are: Sallie Mae's Tuition Answer Loan..." and "If the amount of your student loan was higher than the total of the "qualified higher education expenses" ..., you may seek to have that amount discharged in a chapter 7 bankruptcy through what is called an "adversary proceeding." The information I have seen on related paperwork indicates that the "Bank of Sallie Mae" or similar private institution funds and guarantees the loans as well, and not a federal agency.

    The online document "" highlights some of the limitations to non-dischargable status of student loans. In particular, what drew my attention was:

    "Private student loans which are not school certified generally do not satisfy the requirements to be considered a qualified education loan." and "To be excepted from discharge, a debtor would ... have to show that his or her education loan was not a qualified education loan and was not funded by a nonprofit institution".

    "School certified loans generally satisfy the requirements of a 'qualified education loan' because the colleges enforce limits on the amount of debt that are consistent with [certain] restrictions..."

    "Some of the more common ways in which an education loan may fail to satisfy the requirements of a qualified education loan include:
    2. "Used for costs not included within the definition of cost of attendance..."
    - and -
    9. The debt must be used to pay "qualified higher education expenses", per 26 USC 221(d)(1) by cross-reference from 11 USC 523(a)(8)(B). This term is defined by 26 USC 221(d)(2) as the "cost of attendance".

    What all of these have in common is defining that a certain, limited amount of student loans are "really" qualified student loans; this amount is the "school certified maximum amount" or COA (cost of attendance), and so forth. My school's COA/loan limit was approximately $20,000 per year for each of the three years I borrowed the private loans. However, I had already received the maximum in stafford loans, grants, and other federal programs to cover the COA. This means that each of the 3 Tuition Answer loans (25-30k each) was completely in excess of the cost of attendance certified by the school (in fact their actual amounts were obviously higher than the COA to begin with) -- this means under the definition they are NOT qualified educational loans.

    It seems the purpose of the law is to protect federal loans (both public and private) that are all but guaranteed to the student to meet the COA. Since the government has no (or very little) ability to control risk, it does so by making these loans non-dischargable. However, it does not cover a private institution's private funds, especially since they are obviously NOT part of the COA/financial aid package approved by the school in this case.

    Assuming I am correct, I should be able to discharge these link regular unsecured debt, albeit with a more complicated proceeding to argue the points. So my question is does this logic make sense? And perhaps more importantly, how can I find a lawyer that will help me proceed with this bankruptcy (so far I have not found one who will examine it even though it seems like a solid case) ?

  2. #2
    Join Date
    Sep 2005
    Behind a Desk

    Default Re: Discharge of a Private Student Loan in Chapter 7 (Not a Federally Backed Loan)

    Your bankruptcy lawyer will evaluate the loans based upon the actual facts and loan terms, which will result in a much more accurate determination of dischargeability than a discussion here of when, in theory, your loans might be discharged.

  3. #3
    Join Date
    Jun 2011

    Default Re: Discharge of a Private Student Loan in Chapter 7 (Not a Federally Backed Loan)

    Thanks. Do you know of any way I could more efficiently find a lawyer who might look at this case ? Most as soon as they hear student loans assume the non-dischargable ones and don't want to deal with it, and won't look into the information I have gathered.

  4. #4
    Join Date
    Apr 2007
    Il.(near StL,Mo.)

    Default Re: Discharge of a Private Student Loan in Chapter 7 (Not a Federally Backed Loan)

    There are bankruptcy attorneys who specialize in discharging student loans. You might try
    contacting your local or state bar assoc. & see if they might be able to give you a referral.

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