Student loan debt is still not dischargeable in the vast majority of bankruptcy proceedings in Utah. Even in the few circumstances under which it is, petitioners must meet extraordinarily narrow and strict criteria to have this particular type of debt forgiven. However, Bankruptcy Courts across the country are beginning to find that certain types of “student loans” are not actually student loans at all.

If you believe that repaying your student loans would be financially unsustainable for you, you should talk with legal counsel about what may or may not be possible. Once retained, a lawyer could help you explore your options for discharging student loan debt during Salt Lake City bankruptcy and pursue the best course of action available in your situation.

What is a “Student Loan”?

On the surface, this seems like an easy question to answer. A student loan is a loan someone gets as a student, right? Not exactly. A student loan is a loan provided for an “educational benefit.” For instance, loan proceeds paid to the borrower rather than directly to their school could indicate that the loan is not a “student loan” because the borrower can use those funds for anything.

A loan is considered a non-dischargeable student loan if:

  1. a government student loan program or not-for-profit organization guaranteed the loan; or
  2. the Internal Revenue Code defines it as a “qualified education loan.”

It is usually easy to determine that the government or a not-for-profit organization did NOT guarantee a loan because an “unguaranteed loan” is usually one directly from your school. That leaves the question of whether the loan is a “qualified education loan” under the IRC. The loan is “qualified” only if the school is an “eligible educational institution” identified under Title IV of the Higher Education Act of 1965.

Well, it just so happens that the Department of Education publishes an Excel spreadsheet entitled the “Federal School Code List,” which includes all post-secondary schools that are currently eligible for Title IV Schools. If your institution is NOT on this list, the loan is likely NOT a student loan and is therefore dischargeable in a bankruptcy case.

What is the “Undue Hardship” Requirement?

There is only one way for individuals filing for Chapter 7 or Chapter 13 bankruptcy to get their qualified student loan debt discharged, namely by proving that repaying those loans would represent an “undue hardship” on them and their dependents. In most circumstances, U.S. Circuit Courts in Utah follow the precedent set by a 1987 Second Circuit Court ruling in Bruner v. New York State Higher Education Services Corporation, which defined “undue hardship” based on the following three criteria:

  • The debtor cannot maintain a “minimal” standard of living with their current net income due to their student loan obligations
  • That standard of living problem will likely persist for most or all of the repayment period for the loan(s) in question
  • The debtor previously made good-faith efforts at loan repayment

A debtor must meet all three of these criteria to be eligible to discharge federal student loan debt during their bankruptcy in Salt Lake City. When determining a petitioner’s eligibility for this exception, Courts can make their own calculations of a debtor’s past, present, and potential future income and expenses, as well as any other factors they consider to be relevant.

Other Possible Options for Student Loan Discharge

If a Salt Lake City bankruptcy petitioner is not eligible to have their student loan debt discharged outright, there are a few alternative strategies that could help lessen their financial burden. First, there are various income-drive repayment plans that individuals in good standing with their federal student loan debts can join. If a debtor completes such a repayment plan over the course of 20 to 25 years, the lender will forgive whatever is left of their debt after the plan ends.

Private student loans can also sometimes be partially or fully discharged through ordinary bankruptcy proceedings, depending on the type of education to which it relates. There are rare situations in which student loan debt can be canceled outright, such as when a school committed some form of fraud. Local legal counsel could walk an individual debtor through all their options and help them get the most out of their bankruptcy petition.

A Salt Lake City Could Work to Get Student Loan Debt Discharged During Bankruptcy

Even though student loans are a significant source of long-term debt that millions of people struggle with, bankruptcy does not usually discharge this kind of debt. However, if your circumstances are truly dire or if certain other factors apply, you may be eligible for an exception to this rule.

A knowledgeable lawyer could provide essential help with discharging student loan debt during Salt Lake City bankruptcy. Call today to discuss your case.

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