• Menu
  • Skip to right header navigation
  • Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

John T. Turco & Associates PC, LLO

Omaha’s Premier Bankruptcy Law Firm

  • Call us today for help! (402) 933-8600
  • Search
  • Call us today for help! (402) 933-8600
  • Search
  • Home
  • About
    • Meet Our Bankruptcy Lawyers
    • Client Reviews
  • Bankruptcy & Debt Relief
    • Chapter 7 Bankruptcy
    • Chapter 11 Bankruptcy
    • Chapter 13 Bankruptcy
    • Small Business Bankruptcy
    • Bankruptcy and Divorce
    • Car Loans, Repossessions, and Bankruptcy
    • Foreclosure Assistance
    • Medical Bankruptcies
    • Taxes & Bankruptcy
  • Bankruptcy 101
    • Understanding Bankruptcy
    • What Type of Bankruptcy Do I Qualify For?
    • How to File for Bankruptcy
    • Life After Bankruptcy
    • Debt Collection Practices
    • Credit Reporting Practices
  • Client Resources
  • Blog
  • Contact
  • Home
  • About
    • Meet Our Bankruptcy Lawyers
    • Client Reviews
  • Bankruptcy & Debt Relief
    • Chapter 7 Bankruptcy
    • Chapter 11 Bankruptcy
    • Chapter 13 Bankruptcy
    • Small Business Bankruptcy
    • Bankruptcy and Divorce
    • Car Loans, Repossessions, and Bankruptcy
    • Foreclosure Assistance
    • Medical Bankruptcies
    • Taxes & Bankruptcy
  • Bankruptcy 101
    • Understanding Bankruptcy
    • What Type of Bankruptcy Do I Qualify For?
    • How to File for Bankruptcy
    • Life After Bankruptcy
    • Debt Collection Practices
    • Credit Reporting Practices
  • Client Resources
  • Blog
  • Contact
Student-Debt-Word-Cloud

Can You Wipe Out Private Student Loans in Bankruptcy?

December 22, 2014 //  by John Turco

A few weeks back, I blogged about how it was very difficult to wipe out a student loan in bankruptcy.  Everything mentioned in that blog still applies, including the fact that wiping out student loans in bankruptcy is very difficult.

Now the question presented is whether or not “private student loans” are dischargeable in bankruptcy.  After all, they are “private,” and not federally guaranteed.  Great question.

Private vs. Federally Guaranteed Student Loans

To begin with, a federally guaranteed student loan is ultimately backed by the federal government.  If you fail to make your student loan payments, even if the payments are made to a private entity, then ultimately the federal government will pay off the lender because it guaranteed payment by you to the lender.  Incidentally, prior to June 30, 2010, most federally guaranteed student loans were issued by private entities (banks, Sallie Mae, etc.) but were guaranteed by the government.  Since that date, all federally guaranteed student loans are made directly by the federal government.

By comparison, private student loans are not guaranteed by the government whatsoever.  There may or may not be a cosigner for the loan, but that has nothing to do with the federal government.  If you fail to make your loan payments, (and assuming there isn’t a cosigner), then the lender is out of luck!  They have no guarantor at all.  Naturally, if there is a cosigner (mom, dad, etc), then the private lender could attempt collection from them.

Private Student Loans and Bankruptcy

Mostly there is no difference in how bankruptcy handles private student loans. There is one key difference to focus on and this is the Income Contingency Repayment Plan (“ICRP”).

In short, it is nearly impossible, absent catastrophic circumstances (for example, a very serious and permanent disability) to wipe out a guaranteed student loan without first participating in an ICRP.  Most private student loans do not provide ICRP provisions.

In other words, there is no income contingent repayment plan available.  And, you simply cannot participate in an ICRP if one is not allowed per the terms of the original student loan from the private lender.

A Glimmer of Hope!

Ms. Chelsea A. Conway filed bankruptcy in St. Louis, MO on December 7, 2009.  She owed over $118,579.66 in private student loans and filed a proceeding within the bankruptcy to have these loans wiped out.  The St. Louis bankruptcy judge refused to do so, ruling that Chelsea’s situation did not rise to the level of an “undue hardship.”  Chelsea appealed the Bankruptcy Court’s ruling United States Bankruptcy Appellate Panel for the 8th Circuit (“BAP”).

Note: Nebraska and Iowa bankruptcy courts are subject to the rulings of all 8th circuit appellate courts.

On appeal, the BAP disagreed with the bankruptcy court.  In particular, the appellate court found that Chelsea was making a sincere effort to pay back her private student loans by having paid $5,734.28 to date, working multiple jobs, and having a history of attempting to improve her financial situation. In spite of Chelsea’s best efforts, she was earning less than $25,000 per year, on average, which is hardly enough to make any significant progress on reducing the enormous student loan debt.

Ultimately, the BAP stated that the bankruptcy court needed to compute Chelsea’s “present disposable income, if any, available to service…..a (student) loan over the course of an entire year.”

In short, the bankruptcy court just couldn’t assume that Chelsea was able to pay back her student loan debts but rather needed to specifically determine a certain monthly amount that was reasonable and available for such debts.

As of this writing, Chelsea is awaiting further hearings in the Bankruptcy Court in St. Louis to determine how much she must pay back to her private student loan lenders and what debts, if any, will be discharged.

No Partial Student Loan Discharges

Although not central to the BAP decision, it is very interesting to note that the court went out of its way to suggest that it did not necessarily have the authority to wipe out only a portion of a student loan debt.  Presumably, it’s all or nothing!

In Chelsea’s case, however, she had 15 separate student loans. The BAP was stating, nonetheless, that a bankruptcy court could discharge some of the loans but not necessarily all of them.

This could be potentially very good news for future debtors who are simply unable to pay back their private student loans in total but do have some ability to pay off smaller ones.  Of course, putting forth your best repayment effort before filing bankruptcy is essential to the process.

Guaranteed Student Loans Have the ICRP Option

Had Chelsea’s substantial student loan debt been “federally guaranteed,” my view is that she would have struck out entirely because her combined monthly payments should be (or should have been) equal to her monthly disposable income. In theory, she wouldn’t be experiencing an “undue hardship.”  Thus, the distinction between private student loan debt and federally insured student loan debt becomes very important.

Share
Tweet
Share

Category: Bankruptcy Basics

About John Turco

John graduated from Creighton University in 1986 with a B.S. in Computer Science. He received his J.D. in 1989 from Creighton University School of Law. John has 27 years of experience representing debtors in bankruptcy and debt related matters and is a former Chair of the Bankruptcy Section of the Nebraska State Bar Association. John has appeared on radio shows and has lectured to banking groups on issues regarding bankruptcy and collection practices. John is a member of the Nebraska State Bar Association and a founding member of the American Consumer Bankruptcy College. He is also licensed to practice law in the State of Iowa.

Previous Post: «Debt-Sign Wiping Out Student Loans in Bankruptcy is Difficult
Next Post: Private Student Loans Barred by the Statute of Limitations Student-Pulling-Student-Loan-Weight»

Primary Sidebar

Request a Free Consultation

We'll discuss your situation, offer options, and answer your questions.
  • This field is for validation purposes and should be left unchanged.

Bankruptcy 101

  • What Type of Bankruptcy is Best?
  • Chapter 7 Bankruptcy
  • Chapter 11 Bankruptcy
  • Chapter 13 Bankruptcy
  • Small Business Bankruptcy

Explore the Blog

  • Bankruptcy Basics (40)
  • Bankruptcy Morality, Ethics, & Philosophy (10)
  • Bankruptcy News and Trends (9)
  • Chapter 13 Articles (10)
  • Chapter 7 Articles (4)
  • Dos and Don'ts in Bankruptcy (5)
  • True Stories (2)
  • Uncategorized (1)

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.


This site is not intended to constitute legal advice, nor does it create an attorney-client relationship. The materials on this site are not guaranteed to be complete or current, and they should not be relied on as a substitute for legal advice. This site conveys general information related to bankruptcy law in Omaha, Papillion, Bellevue, Gretna, Council Bluffs and surrounding communities. If you are contemplating or involved in any matter in which legal advice or other expert assistance is required, the services of a competent professional should be sought. The determination of the need for legal services and the choice of a lawyer are extremely important decisions and should not be based solely upon advertisements or self-proclaimed expertise. This disclosure is required by rule of the Supreme Court of Iowa. Memberships and offices in legal fraternities and legal societies, technical and professional licenses, and memberships in scientific, technical and professional associations and societies of law or field of practice does not mean that a lawyer is a specialist or expert in a field of law, nor does it mean that such lawyer is necessarily any more expert or competent than any other lawyer. All potential clients are urged to make their own independent investigation and evaluation of any lawyer being considered. This notice is required by rule of the Supreme Court of Iowa.

Copyright © 2021 John T. Turco & Associates, PC LLO · All Rights Reserved · Sitemap