My question of the week comes from a client who wanted to know if private student loans he owed on were discharged in a bankruptcy case he filed in 2002.
For bankruptcy cases filed PRIOR TO October 17, 2005, if the PROGRAM under which a student loan was issued, insured, administered was a FOR-profit, PRIVATE (non-government) entity, the loan/debt may have been discharged. However, if the program itself, such as LAL, GSL, etc. received nonprofit funding by participation of nonprofit entities, the loan is not dischargeable in bankruptcy.
To see a ninth circuit case which examines the private vs. government distinction on student loans in bankruptcy, see In re Pilcher
For bankruptcy cases filed after October 17, 2005, the only way a student loan is dischargeable is if the debtor can prove “undue hardship” as that term is interpreted by the courts in whatever district the case is filed in. It is a difficult standard to meet, and the vast majority of student loan debts are not dischargeable.
To see more on how the undue hardship test is applied in the ninth circuit, see http://www.bklaw.com/chapter7/student_loans.html
For cases filed prior to October 7, 1998, student loans were dischargeable if they were in repayment status for a certain period of time.
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Looks like Congress is again taking up new legislation on private student loans. We’ll have to see how it progresses this time. It is important to keep in mind, however, that VERY FEW loans are truly private in the sense that they would qualify for discharge if such a new law is passed. Historically, any loan that is administered through a government program, even if borrowed from a private bank, was considered a “public” student loan.