I Was Told There is No Help for My Private Student Loans if I Filed Bankruptcy


Dear Steve,

I owe a small fortune in student debt. I thought it was all “federal” loans, but apparently I took out a lot of “private” Sallie Mae loans as well. That I did not realize at the time. Finally, after years of being out of the workforce and a professional student, I now work for the federal government, earning $43K now and I’ll be at $63K in two more years. I also have a 3 year old now, and a wife who is a full-time undergrad student and does not work now (she’s on a full scholarship, so I don’t have to pay her tuition, just our costs of living).

I’m in a payment plan for my “federal” loans- I’m already a year in, and I’m so relieved to have this off my back.

Unfortunately, I ALSO have about $200K and compounding interest in “private” Sallie Mae/ Navient loans. Most of that money I took in a “manic” mode, as Sallie Mae offered me about $18K more than I actually needed EACH SEMESTER (it was predatory lending, for what that’s worth). During this dark decade of my life, I also went through divorce, lost pregnancy, and depression, and couldn’t find gainful employment, and frankly I got “addicted” to these student loans. I actually tried and failed to start a stupid business with that money- I was naively thinking I’d succeed and pay back the borrowed student loans with the income I’d earn from the business (which failed). Like I said, I was “manic,” and often depressed. And desperate and short-sighted.

I’ve matured since then. I am now remarried, I graduated with a Master’s degree, and I have a job (best job I’ve ever had, but I’m happy with $43K and upward mobility potential). And I have a 3 year old kid I worship too. So life is better. But I’m haunted by these private loans still.

I’ve got no choice but to default on these private loans (again, I’m paying my federal loans, which are also very substantial). I have also hired a lawyer who is supposed to negotiate my private loans down.

Also, this is a key development. Two years ago I received $20K from my grandmother, as an inheritance. As it happens, some con artists scammed me to “partner” in a restaurant, and buy in as a “co-owner.” Being unemployed and unable to find work, and desperate, I joined this business. I had known these people for years, and trusted them. I never expected I would be scammed. So about a month later after “joining” their restaurant and paying about $30K into it, I learned this restaurant was over $150,000 dollars in debt, much of it in unpaid rent. The landlord was locking the doors- within 24 hours…. I had been set up- these people knowingly tried to stick a hot potato in my lap and conned me out of $30K at this point. Desperate, I maxed out my credit cards to pay the landlord- and immediately I had a real estate agent looking to sell the restaurant for me (which had $60,000 worth of equipment still inside), and hoped I could break even. Long story short, I ended up losing $65,000- most of it in consumer credit, and what cash I was able to earn during this time (I was making $15.00 an hour in a job I found, plus a few other ways I came up with funds). Again, in total, I lost $65K and about 8 months of my life fighting to save it.

See also  My Private Student Loans Can Be Discharged in Bankruptcy, Right?

The good news is, I am suing the conman, and I have a lien on their $350K property. Eventually, I expect a settlement of around $80K….. possible more for damages. I plan to use that lump sum to hopefully “settle in full” with my Private loans at Sallie Mae/ Navient. I realize that could take some time to turn this judgment against their house into actual money, but I am confident I’ll eventually get it (since I have a house as collateral).

My question is: Is my plan realistic? My plan being to default and try and settle for .25 cents on the dollar (or an approximate amount, whatever I can afford with this civil suit settlement payout?)

Do I have a better option? Can I file bankruptcy on the “private” loans since they far exceeded “qualified education expenses?” Is that a loophole? My own bankruptcy lawyer says it’s not possible, but I almost wonder if they are simply being lazy or are uninformed. I live in Texas by the way, but I’d be willing to move to another State to find a more sympathetic bankruptcy judge.

The other related question is, I used up all my consumer credit during this fraud. I now have to file Ch 7 bankruptcy on my consumer credit cards. This act of fraud left me homeless (with wife and kid staying with in-laws) until I found my current $43K a year job (thanks be to God I found that job). But my credit is ruined, and I need to file Ch. 7. That’s just a reality. I probably owe about $30K in consumer credit loans.

My question is this: if I file Ch 7, and then “win” this civil case and get a $80,000 (or more) in a settlement, will that settlement be seized by all my creditors (both consumer credit and Sallie Mae/ Navient)? If that happens, I would lose about $30-40K to consumer creditors and I would have less to pay off my ‘private” student loans, and then I would not be able to settle with Sallie Mae/ Navient with the lump sum I’m expecting.

What I’m hoping is this. I file Ch. 7 on my consumer credit debt. Then I get this settlement (maybe in 2-4 years), and then I would use these settlement funds to pay off my Private Sallie Mae/Navient loans in full. They can have the whole damn settlement for all I care (minus what I owe my wife, who is a claimant on this settlement too). And then I’d be debt free and never get into a situation like this ever again.

Please give any advice you can. I love your blog Sir, it’s by far the most informative source out there.




Dear Joshua,

Thank you for submitting your question. On the federal loan front it sounds like you have those under control. You should probably make sure your loans qualify for forgiveness under the Public Service Loan Forgiveness program now that you are a government employee.

The program is not perfect and is full of administrative snafus but if your federal loans qualify for forgiveness then after 120 qualifying months of payments as low as $0 per month, the balance of your loans may be forgiven.

See also  Should I Stop Paying My Private Student Loans or File Bankruptcy?

On the private student loan front I think you need maybe a second or third opinion on the inclusion of the loans in bankruptcy. At the very least it certainly sounds like you have a real issue surrounding that part of your private student loans that exceeded the limits of a “qualified educational expense” and the amounts above that may not be protected in bankruptcy from discharge.

Do You Have a Question You'd Like Help With? Contact Debt Coach Damon Day. Click here to reach Damon.

You should read Here is Why Your Private Student Loan May Able to Be Eliminated in Bankruptcy.

And if you are seeking a second opinion, you may want to read My List of Student Loan Attorneys You Should Consider for Assistance.

It also seems you have some additional strategies to deal with the private student loans even outside of discharging portions of the loans in bankruptcy. Based on your intentions and goals it might be worth considering your default approach but combine that with the assistance of a knowledge professional or attorney who could make the argument a significant part of the loans may be not protected in bankruptcy and reach a settlement.

In that case it might be better to talk to a bankruptcy attorney about not filing just yet but taking some time to explore dealing with the private student loans first and then if you are getting nowhere you can proceed with the bankruptcy. You can always file bankruptcy at any time if the other creditors get unreasonable but at least this way you can attempt to resolve your overall debt situation instead of just $30,000 worth of consumer debt.

Here is the bottom line, you have a situation that has some good points to explore and get information about first. I would discuss those issues with an attorney who is experienced in dealing with student loan issues. Based on that information you might want to embark on and effort first of coming to some solution for the private student loans and hold bankruptcy in reserve for now.

If you’d like to talk through a strategy like this, you may want to contact my debt coach friend Damon Day.

Damon Day - Pro Debt Coach

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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