Skip to main content

Search

Student Loan Law: 15.1.2.1 The Automatic Stay

An advantage of bankruptcy is that filing a chapter 7 or chapter 13 petition instantly protects the student from most collection actions on claims arising before the bankruptcy.

Student Loan Law: 15.1.2.2 The Discharge Order

After the bankruptcy case has closed and the automatic stay is no longer in effect, the creditor may resume collection activity on a nondischargeable student loan. This action will not violate the discharge order entered at the close of the bankruptcy case.22 Typically, the bankruptcy court will not have made a specific determination as to the nondischargeability of the educational debt during the pendency of the case.

Student Loan Law: 15.1.2.3 Tuition Debts Are Dischargeable

An obligation to pay tuition, absent any formal agreement on repayment terms, is a dischargeable debt.43 The automatic stay and the discharge order bar creditor actions to collect unpaid tuition during and after the bankruptcy case. A common device used by educational institutions to coerce payment of unpaid tuition bills is to withhold transcripts and other certifications of course completion.

Student Loan Law: 15.2.1 The Special Restriction on Dischargeability Applies to Most Student Loans

A chapter 7 or 13 discharge eliminates all of a debtor’s unsecured debts, with certain statutory exceptions. While student loans are technically unsecured debts subject to discharge, the Bankruptcy Code limits their dischargeability. Most educational loans can only be discharged upon a finding by a court that repayment of the debt “will impose an undue hardship on the debtor and the debtor’s dependents.”45

Student Loan Law: 15.2.2 The Time-Limited Exceptions to Discharge for Cases Filed Before 1998

The special limitations of discharge applicable to student loans have gone through a number of changes.46 Until 1998, most student loans were eventually eligible to be discharged in bankruptcy. In the Code as originally drafted in 1977, student loans were dischargeable like any unsecured debt. Changes in 1978 allowed unfettered discharge of student loan debts that had been owed for at least five years.

Student Loan Law: 15.2.3.1 Generally

Under the current wording of section 523(a)(8), applicable to chapter 7 and chapter 13 bankruptcy cases filed after October 17, 2005, the debtor seeking to discharge a student loan debt must satisfy the undue hardship standard if the debt falls within any of the following categories:

Student Loan Law: 15.2.3.3.3 There must be “funds received” for an educational benefit

The specification under subsection (A)(ii) that there be “funds received” requires some transfer of funds either to the educational institution or to the debtor. This limitation excludes, for example, deferred tuition payment agreements.90 However, for subsection (A)(ii) to apply, the funds need not have been paid directly to the debtor. Subsection (A)(ii) applies to funds for an educational benefit, scholarship, or stipend paid to an educational institution on behalf of the debtor.91

Student Loan Law: 15.2.3.4.1 General scope of exception for private loans

The 2005 amendments added new subsection (B) to section 523(a)(8). Subsection (B) provides that, in addition to the educational debts described in subsection (A), any other obligation that is a qualified educational loan as defined in section 221(d)(1) of the Internal Revenue Code (“IRS Code”) is also nondischargeable.

Student Loan Law: 15.2.3.4.2 Requirements for who can be a lender

The regulatory framework of the IRS Code and the Higher Education Act (HEA) limits the institutions where covered loan funds may be spent. However, the “qualified education loan” standards do not explicitly address who may originate a covered loan.97 Other than excluding loans from family members, the statute and regulations do not address the source of the loans. The only text that appears to limit who can be a loan originator is the exclusion of “any indebtedness owed to a person who is related . . .

Student Loan Law: 15.2.3.4.3 Requirements for who can be a borrower

The applicable definition of an “eligible student” includes requirements for a minimum course load and length of the study program.99 In addition, the creditor bears the burden of establishing that the debtor who took out the loan was in fact a “taxpayer” at the time.100 However, the exception applies to loans that are eligible for the tax deduction, and whether the taxpayer actually claimed the deduction is not determinative.101

Student Loan Law: 15.2.3.4.5 Requirements for the timing of expenditures

In order to be considered a qualified education loan under subsection (B) of section 523(a)(8), the loan must have been taken out to pay expenses for education furnished during a period when the recipient was an eligible student at a qualifying institution.114 For example, taking out a private loan to pay for tuition while enrolled at a qualifying law school would create a nondischargeable loan.

Student Loan Law: 15.2.4.1 Debts Incurred Through Employer-Sponsored Programs

In addition to covering certain lenders, section 523(a)(8) is directed toward loan transactions with an educational purpose. In some instances, the purpose of a loan may place it outside of the dischargeability exception. For example, an employer may pay off the costs associated with an employee’s education and training as part of a hiring agreement.

Student Loan Law: 15.2.6 The Role of Programs Guaranteed or Insured by a Nonprofit or Government Entity in Cases Decided Under the Pre-2005 Version of Section 523(a)(8)

For cases filed after October 2005, subsection (B) of section 523(a)(8) will make it unnecessary to consider some of the more subtle distinctions between private and government/nonprofit loans that produced considerable litigation before the 2005 amendments. New subsection (B) extended the scope of the discharge exception to all student loans that qualify for the IRS tax deduction for interest paid on student loans.

Student Loan Law: 15.2.7 Applying the Time-Based Discharge Provisions for Cases Filed Before October 7, 1998

Beginning with bankruptcy cases filed after October 7, 1998, the discharge of student loans that first became due more than seven years prior to the bankruptcy filing was no longer allowed.174 Cases filed before October 7, 1998 are not affected by the change in the law. The following discussion of discharges under the seven-year rule is still relevant for consumers who filed before the change in law, and there remains a question as to whether a student loan was discharged.