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  1. #1

    Default Discharging Student Loans by Proving the Lender Didn't Meet Federal Standards

    My question involves bankruptcy in the state of: OHIO


    I understand that private student loans are not dischargable unless you prove undue hardship in a adversary proceding. Recently I came across this an article that mentions a provision that a loan MAY BE dischargeable after all due to it not meeting one of the Internal Revenue Codes set forth for bankruptcy [2nd quoted paragraph].


    Background: Co-signed for a student loan in June 2005. The original guarantor was a non-profit [TERI]. I filed for Chapter 7 October 13th, 2005, 4 days before the BAPCPA Act took effect. I understand this didn't affect the loan since the guarantor [TERI] was non-profit. My Chapter 7 was discharged in 2/16/2006.


    "Section 523(a)(8) of the Bankruptcy Code states that student loans cannot be discharged, unless payment of the student loans would impose an undue hardship upon the debtor or his dependents. This section has been part of the bankruptcy law for over twenty-five years. It was also amended in 2005 to include private student loans.

    However, not all loans incurred in connection with education costs are student loans. For a loan to fall with this section, (1) it must have been made under a government or nonprofit student loan program, or (2) it must be a qualified educational loan under section 221(d)(1) of the Internal Revenue Code, for attending an eligible education institution as defined in section 221(d)(2) of the Internal Revenue Code, and incurred for costs of attendance as defined in section 472 of the Higher Education Act.

    If you have a student loan and are filing for bankruptcy, it would be wise to discuss with your attorney whether your student loan falls within these definitions. Perhaps your student loan bill arrives from Sallie Mae and you attended a public university; in such a case you probably can conclude that your student loan qualifies under definition (1) above. If so, you cannot discharge the student loan in bankruptcy unless you can prove undue hardship.

    On the other hand, if you attended a for-profit trade school and obtained a private loan from the school, or from a financial institution to which the school referred you, maybe none, or only part, of such a loan qualifies under definition (2) above. Remember, if a private student loan does not qualify under the extensive legal provisions referred to in definition (2), the loan is dischargeable without your having to prove undue hardship.

    For example, perhaps you were not an “eligible student” at the time the private student loan was made to you; or maybe the loan was not incurred to pay “qualified education expenses”; or perhaps the loan was not for attendance at an “eligible education institution” because the school was not accredited under Title IV of the Higher Education Act. All these are requirements imposed by section 221(d) of the Internal Revenue Code. Failure of a private student loan to meet any of these criteria means that the loan is fully dischargeable, because it would not qualify under section 523(a)(8) of the bankruptcy law.

    Because section 523(a)(8) incorporates requirements contained in section 221(d) of the Internal Revenue Code, persons filing for bankruptcy and owing private student loans should carefully review section 221(d) with their attorney to determine if such loans are dischargeable. Section 221(d) is lengthy, and it imposes many requirements which must be met before a loan can qualify as a student loan. If your loans fail to meet these criteria, you may be able to discharge them in your bankruptcy."

    The loan in question was taken under the presumption it was to be used for tutition. That didn't happen. I know for a fact that $$$ wasn't used for school, and if it was very little as her attendance was spotty but I can verifty with the register's office when I obtain transcripts. If I can prove the loan wasn't used by the guidelines in the Internal Revenue Code is it possible that the discharge of this loan in my 2005 Chapter 7 filing will be recognized? I'm going to the local IRS office tomorrow and have them look up the Code before I bring this matter to the attention of the attorney that filed my Chapter 7.

    Also if I can obtain a "letter of release" as co-signer from the collection firm would this release be recognized by the guarantor of the loan? TIA.

  2. #2
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    Default Re: Failure of Borrower to Met Internal Revenue Code Makes Student Loan Dischargable

    This is something you should be asking your attorney.

  3. #3

    Default Re: Failure of Borrower to Met Internal Revenue Code Makes Student Loan Dischargable

    Quote Quoting Dogmatique
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    This is something you should be asking your attorney.

    Oops. I thought this was mentioned in my OP.


    I'm going to the local IRS office tomorrow and have them look up the Code before I bring this matter to the attention of the attorney that filed my Chapter 7.

  4. #4
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    Default Re: Failure of Borrower to Met Internal Revenue Code Makes Student Loan Dischargable

    Exactly. We cannot second-guess your attorney.

  5. #5

    Default Re: Failure of Borrower to Met Internal Revenue Code Makes Student Loan Dischargable

    Quote Quoting Dogmatique
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    Exactly. We cannot second-guess your attorney.
    Because they're always correct?

  6. #6
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    Default Re: Failure of Borrower to Met Internal Revenue Code Makes Student Loan Dischargable

    Are you being deliberately obtuse?

    No. Because S/HE knows your case intimately. WE do not.

  7. #7
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    Default Re: Discharging Student Loans by Proving the Lender Didn't Meet Federal Standards

    Quote Quoting Sonatina
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    The loan in question was taken under the presumption it was to be used for tutition. That didn't happen.
    The question of whether you misuse the funds you borrow is separate and apart from whether the lender followed proper practices. For example, if you obtain a qualified student loan but then use the proceeds to buy drugs, nobody is going to dispute that you did not use the loaned funds as intended, but that's all on you.

  8. #8

    Default Re: Discharging Student Loans by Proving the Lender Didn't Meet Federal Standards

    Quote Quoting Mr. Knowitall
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    The question of whether you misuse the funds you borrow is separate and apart from whether the lender followed proper practices. For example, if you obtain a qualified student loan but then use the proceeds to buy drugs, nobody is going to dispute that you did not use the loaned funds as intended, but that's all on you.
    The Internal Revenue Code is clear, that the purpose is for tuition. If that criteria wasn't met then why don't I have a case?

  9. #9
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    Default Re: Discharging Student Loans by Proving the Lender Didn't Meet Federal Standards

    Quote Quoting Sonatina
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    The Internal Revenue Code is clear, that the purpose is for tuition. If that criteria wasn't met then why don't I have a case?
    What is it that you don't understand? The fact that you abuse the proceeds of the loan doesn't change it's purpose.

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