Forum Rules (Everyone Must Read!!!) (updated: 04/28/2015)

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Discharging a private student loan

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  • Discharging a private student loan

    I have a $32,000 private student loan from a company called My Rich Uncle (MRU Holdings) which later went bankrupt. I feel this is a student loan that can be discharged. The lender paid the entire $32,000 directly to me in one lump sum. I had just enrolled at a reputable private university and tuition for the semester was around $10,000. I was 21 years old and am now 25. None of the money went to the school for tuition. After I received the check, I dropped out of school. I never even attended a single class. I used the money for a vending machine business and invested it. Ended up losing all of it. Anyways, not one cent of this money was used for a book, tuition, or any sort of educational expense.

    Based on Section 523(a)(8) and 221(d) I think that this loan should be fully dischargable.

    Do you think I have a case? I would really appreciate your thoughts on this.

    I can't post links yet but you can also refer to an article from Craig Andresen by googling "student loans may be discharged after all"


    It is worth noting that the extension of the bankruptcy exception to qualified education loans in 11 USC 523(a)(8)(B) cross-references IRC section 221(d)(1) for the definition of a qualified education loan. This section of the Internal Revenue Code requires the loan to be used "solely to pay qualified higher education expenses". IRC section 221(d)(2) defines qualified higher education expenses as:

    The term "qualified higher education expenses" means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before the date of the enactment of this Act) at an eligible educational institution, reduced by the sum of --

    the amount excluded from gross income under section 127, 135, 529, or 530 by reason of such expenses, and

    the amount of any scholarship, allowance, or payment described in section 25A (g)(2).

    So to qualify for this exception, the private student loan must be capped at the cost of attendance minus student aid, such as scholarships, and expenses paid for using amounts from employer tuition assistance, 529 college savings plans and prepaid tuition plans, US savings bonds and Coverdell education savings accounts. If a borrower were able to show that the loan exceeded the limits set by IRC section 221(d)(2), they might be able to argue that the loan was ineligible for bankruptcy protection and so should be subject to discharge. See IRS Tax Topic 456 and IRS Publication 970 for further IRS guidance on what types of expenses qualify, such as the requirement that the expenses must have been "paid or incurred within a reasonable time before or after you took out the loan" (per IRC section 221(d)(1)(B)). IRS Publication 970 provides a safe harbor of 90 days before and after the academic period to which the expenses relate. Consolidation loans and other loans used to refinance a qualified education loan also qualify, provided that there was no cash out from the refinance (or that the cash out was used solely for qualified higher education expenses). Eligible student is defined by IRC section 25A(3) as a student enrolled at least half time in a degree or certificate program at a Title IV institution (per Section 484(a)(1) of the Higher Education Act of 1965).

  • #2
    Another thing to think about is the statute of limitations. In addition to being non-dischargeable (absent undue hardship) traditional, government-funded student loans are not subject to any statute of limitations. With private student loans, that defense is still available. What is the SoL in the relevant jurisdiction for this loan?
    Pay no attention to anything I post. I graduated last in my class from a fly-by-night law school that no longer exists; I never studied or went to class; and I only post on internet forums when I'm too drunk to crawl away from the computer.


    • #3
      As MSbklawyer points out, you may have a statute of limitation argument, but not likely dischargeable.


      • #4
        thanks for the reply guys. I am not sure really what the statute of limitations means exactly. I live in Ohio and the debt has been in deferrment for a while since I am still working on completing my degree.


        • #5
          A statute of limitations is a state law that gives the creditor a specified amount of time to sue you on a debt that you have ceased to pay as agreed in your contract. The amount of time varies from state to state. In Ohio, it is extremely long. The creditor would have 15 years to sue you from the time you defaulted on the loan. Other states have much shorter statutes of limitations, some as short as 3 years. If you move, you will generally be sued in the state where you reside, which means that the statute of limitations of the state in which you are being sued will apply.

          But before you pack up and move out of Ohio, keep in mind that you haven't even defaulted yet. In fact, it sounds like you haven't missed a payment. If you do default and then decide to wait to be sued so that you can use a statute of limitations argument, you will hurt your credit tremendously in the process, and ultimately you may end up getting sued the day before the statute of limitations has run, which means that you will have a valid judgment against you for the debt. 32k isn't that much as far as student loans are concerned. You could probably pay as little as a few hundred dollars a month once your deferment ends. Might be best to just focus on paying it off.


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