Student Loan Related

Did I Paint Myself Into a Corner With My Loan Consolidation?

Written by Steve Rhode


Dear Steve,

I went through Chapter 7 bankruptcy in April 2016 and all credit card debt was discharged. My Stafford student loans were, of course, not included in the discharge and so I’m back to paying those off slowly. However, while I was pursuing an MA degree in 2006, I needed loans above and beyond what Stafford could provide, so I used Sallie Mae’s Tuition Answer loans to use for living expenses. I’ve read that these loans can sometimes be discharged because they were loans provided directly to me and not to the educational institution for tuition or room & board, etc., but correct me if I’m wrong about that. In 2008, I consolidated these Sallie Mae loans at a lower interest rate with Key Bank. Looking at the original paperwork, I now see that there was a provision in the consolidation loan that it couldn’t be discharged in chapter 7. I don’t think my bankruptcy lawyer in 2016 included this consolidation loan in the list of debts to be discharged and I’m now getting calls for collection on this debt.

My questions are two-fold: 1) Did I paint myself into a corner by consolidating what could potentially have been discharged into a consolidation loan with a different lender that had that “no chapter 7 discharge” provision? and 2) What, if anything, could I do to retroactively apply the discharge decision by the bankruptcy court to this loan if it was mistakenly omitted?

I’m anticipating the answer is I will have to deal with collections and set up a payment plan and luckily I’ve found steady employment. Frustratingly, unlike Stafford loans, there was no option with the consolidation loan to defer payments while I was unemployed. Their rigidness was disheartening and the letters demanding payment in full of $40,000 while I was beginning the bankruptcy process were infuriating.

Any advice would be appreciated. I’m also reaching out to the lawyer who assisted me with the bankruptcy filing last year, but I would like another opinion. Thanks!

READ  Is It Really Possible My Tuition Answer Student Loans Were Discharged in Bankruptcy?



Dear Ryan,

I don’t think all hope is lost. Just because the paperwork has that provision in it does not make it so. I’ve never heard of anyone being able to contract themselves out of their legal right to discharge debt through federal law.

You should direct your attorney to look at these posts. Even Sallie Mae admitted the loans were vulnerable to discharge in bankruptcy and then putting them into the new loan that was also not a qualified educational loan should not change that fact.

If your attorney has additional questions they could contact one of the attorneys on this list. Attorney Austin Smith in New York is an expert in this exact issue.

Your attorney will probably need to file an Adversary Proceeding on this matter but I would be surprised if it did not result in a discharge of that loan.


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About the author

Steve Rhode

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.


    • Hi Steve,

      An update – my attorney has been discussing the issues with opposing counsel and has come to the conclusion that we may not prevail in our district. His assessment is that most courts have adopted the “purpose test” over the “use test”, e.g. the stated purpose of the loan controls whether it is a qualified educational loan or not. All of my loan documents, including the original Sallie Mae Tuition Answer loans, indicate that the loans were being made for educational purposes. Thus, my attorney is saying that even though my loans were used for rent or paying down credit cards (not the wisest choice I ever made), that we cannot argue they can be discharged as their purpose was educational.

      Do you have any thoughts on this assessment or other positions to consider? We’re at a point now where we might settle for half the amount owed, but I wonder what the chances are if pursued further beyond settlement.

      Would appreciate any of your thoughts. Thanks.


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