Borrowers of private student loans subject to collections efforts after bankruptcy may have rights against the collectors they were not aware of.

Private Student Loans vs. Federal Loans

Private student loans
are different from federal student loans. Theoretically, federal loans can be discharged on a showing of extreme financial hardship. But making that showing is so difficult that it’s practically impossible for most borrowers.

Private loans, on the other hand, may be dischargeable through bankruptcy proceedings. A 2005 federal law exempts only certain private student loans from discharge, but only under certain conditions.

These “qualifying education loans” must be incurred by an eligible student for qualifying educational expenses at an accredited institution. Loans that don’t meet that description don’t qualify for exemption from bankruptcy discharge.

The amount of the loan can affect whether the discharge exemption applies. For example, loans for amounts over and above the school’s stated cost of attendance are not qualifying education loans. That extra loan amount over the cost of attendance means the loan was not taken out solely for “qualifying educational expenses.”

Similarly, if the borrower was not an “eligible student,” their loan is not a qualifying education loan. An eligible student is one enrolled in an eligible program at half-time attendance or more. So if the student was enrolled for less than half-time, their loan may be dischargeable.

Even some loans disbursed under the Sallie Mae “Tuition Answer” program may be non-qualifying loans that are dischargeable in bankruptcy.

Some confusion has arisen over a provision in the Bankruptcy Code that appears to prevent the bankruptcy discharge of any debt that may be considered an “obligation to repay funds received as an educational benefit.”

This provision originated decades ago during the time of a federal program that offered students “scholarships” in exchange for a commitment to military or civilian government service after school. Some students ended up taking the scholarship funds, failed to show up for their end of the bargain, and attempted to get the obligation discharged in bankruptcy.

Congress responded with a law that prohibits the discharge of an “obligation to repay funds received as an educational benefit.” Student loan creditors have used this provision for years to claim exemption for any educational debt.

But more recently, courts and savvy debtor’s rights attorneys recognize that this statute does not specifically apply to student loans. Therefore, creditors should not be able to use it to prevent bankruptcy discharge of non-qualifying private student loans.

Shielding Student Debtors from Debt Collection

The myth that student loans are non-dischargeable persists, however. Some debt collectors may act on that myth, attempting to shake down student debtors whose loans have been discharged in bankruptcy.

These debt collection efforts may be illegal, and the debtors who face them have legal rights they can enforce.

Provisions of the Fair Debt Collection Practices Act protect debtors from collection efforts that target discharged debts. The bankruptcy court’s order of discharge itself protects the debtor from attempts to collect any debt that’s subject to the discharge.

Debtors who have faced such erroneous collection efforts may be able to bring their own claims against the collector to seek actual and punitive damages.

Debtor rights attorneys are now interested in speaking with persons who have been subject to collection efforts targeting their private student loan debt after they went through bankruptcy. Qualifying persons may be eligible to participate free of charge and receive a free legal consultation.