Student Loan Bankruptcy Discharge

Imminent Suit Against Navient Raises Student Loan Bankruptcy Discharge Issues

Written by Steve Rhode

Attorney Chad Van Horn in Florida, who by the way was just named a leading bankruptcy attorney, has an interesting case going.

In this case, he is pursuing damages against Navient for continuing to attempt to collect on student loan debt following the bankruptcy discharge of his client.

Van Horn raises a very interesting issue. The allegation is the Sallie Mae student loan debt was not used for educational purpose, was a private student loan, and and the client was a co-signer on the loan.

The issue comes back to a key point I’ve been writing about for years.

There is a tremendous misperception about which student loans are protected in bankruptcy and which can be discharged. A common belief is no student loan can be discharged. That is just factually untrue.

If the student loan, in this case, was actually discharged under the law then the continued collection efforts of Navient would have been a violation of law, resulting in substantial penalties.

The argument Van Horn is going to present is similar to what attorney Austin Smith has been saying:

The loan does not qualify under § 523(a)(8)(A) or (B) in order to be excepted from discharge.

Section 523(a)(8) of the Bankruptcy Code excepts from discharge:

(A) (i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit,
scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

In order to be protected from discharge in bankruptcy the student loan needed to be a qualified educational loan.

The definition of a qualified education loan according to the Internal Revenue Service (IRS) says:

The term ‘qualified education loan’ means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses–(a) which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred, (B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and (C) which are attributable to education furnished during a period during which the recipient was an eligible student.

Well as you can see, the debt was not incurred on behalf of a taxpayer who was the debtor, the debtor’s spouse or the debtor’s dependent.

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On face value, the co-signer should have had the private student loan discharged in their bankruptcy.

We will just have to watch what the court is going to do here. You just know Navient is going to fight back hard.




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.

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