Educational Debts that are Dischargeable in Bankruptcy

August 6, 2013

The general rule in bankruptcy is that a debtor is not able to discharge student loans absent a showing of undue hardship (a very difficult standard to meet in most courts). However, not every debt to a college or university is accepted from discharge. Some debts, like unpaid tuition, may qualify for discharge during bankruptcy.

The bankruptcy discharge is very broad; ts interpretation favors discharging debts and providing the debtor with a fresh start. Consequently, and exception to discharge is treated very narrowly. Congress has carved out the student loan exception and identified the following debts as non-dischargeable (except for undue hardship) under bankruptcy chapters 7, 11, 12, or 13:

(A)(i) an educational benefit over payment 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.

Consequently, non-dischargeable education debts are qualifying loans (generally requiring evidence of a promissory note), or educational payments made by the school to the student, as in an advance of cash or exchange of money. Owed college tuition does not fit into the non-dischargeable category. For instance, if you attend classes without paying or signing a promissory note (an agreement signed on or about the same time providing for a definitive amount to be repaid, in specified installments, by a certain time, and at a certain interest rate), you likely can discharge this debt in bankruptcy. The same principle applies to debts at the student union, gym, bookstore, and room and board debts.

The determination whether a debt is dischargeable in bankruptcy is usually a complicated matter. Your bankruptcy attorney can explain how the local bankruptcy court will analyze the debt and the likely conclusion. For a free consultation with one of our experienced bankruptcy attorneys, contact us here or call the office at 1.866.705.7584.

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