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Why Transferring Student Loans to Credit Cards is Not a Good Idea

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As the looming crisis of student loan debt nears, some enterprising debtors are no doubt getting desperate. Student loan debtors are being hounded by collection agencies night and day, tax refunds are being intercepted, and wage garnishments are inevitable. So some enterprising debtors are getting the idea to transfer their student loan debt to credit cards with the idea of either getting a better deal on interest or later discharging that debt in bankruptcy. Don’t do it!

Unfortunately, the laws and regulations are one step of ahead of you. Refinanced or consolidated student loans are still considered student loan debt and excepted from bankruptcy discharge. Bankruptcy code section 523(a)(8)(B) incorporates the IRS definition of student loan under Internal Revenue Code 221(d)(1). That section specifically states the following:

…Such term [Qualified Education Loan] includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan.

In common sense terms, a qualified education loan includes the refinance of that loan; e.g. transferring the loan to a credit card. See also Code of Federal Regulations, CFR 1.221-1(e)(3)(v).

There is the argument that credit cards are not “solely” education loans as is required by IRC 221(d)(1); however, to date, that argument has not been tested, but analogous cases indicate that such an argument on a technicality would not be received favorably. A qualified education loan is “indebtedness incurred by the taxpayer solely to pay qualified higher education expenses;” so the argument is that credit cards, so long as other charges are on those cards are not a refinance or indebtedness incurred to solely pay a qualified higher education expense.

I empathize with your plight, but do not transfer student loan debt to credit cards with the expectation that you could later discharge those credit cards in bankruptcy, that tactic is a non-starter. – Source

This post was contributed by Matt Berkus, a bankruptcy attorney in Denver, Colorado.

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