Failure of borrower to met Internal Revenue Code makes student loan dischargable?

[MothAudio]

Maybe I stumbled onto something. Co-signed for a student loan in June 2005. The original guarantor was a non-profit [TERI]. I filed for Chapter 7 October 13th, 2005, 4 days before the BAPCPA Act took effect. I understand this didn't affect the loan since the guarantor [TERI] was non-profit. FYI, my Chapter 7 was discharged in 2/16/2006.

Recently I came across this an article that mentions a provision that the loan may be dischargeable after all.

Section 523(a)(8) of the Bankruptcy Code states that student loans cannot be discharged, unless payment of the student loans would impose an undue hardship upon the debtor or his dependents. This section has been part of the bankruptcy law for over twenty-five years. It was also amended in 2005 to include private student loans.

However, not all loans incurred in connection with education costs are student loans. For a loan to fall with this section, (1) it must have been made under a government or nonprofit student loan program, or (2) it must be a qualified educational loan under section 221(d)(1) of the Internal Revenue Code, for attending an eligible education institution as defined in section 221(d)(2) of the Internal Revenue Code, and incurred for costs of attendance as defined in section 472 of the Higher Education Act.

If you have a student loan and are filing for bankruptcy, it would be wise to discuss with your attorney whether your student loan falls within these definitions. Perhaps your student loan bill arrives from Sallie Mae and you attended a public university; in such a case you probably can conclude that your student loan qualifies under definition (1) above. If so, you cannot discharge the student loan in bankruptcy unless you can prove undue hardship.

On the other hand, if you attended a for-profit trade school and obtained a private loan from the school, or from a financial institution to which the school referred you, maybe none, or only part, of such a loan qualifies under definition (2) above. Remember, if a private student loan does not qualify under the extensive legal provisions referred to in definition (2), the loan is dischargeable without your having to prove undue hardship.

For example, perhaps you were not an “eligible student” at the time the private student loan was made to you; or maybe the loan was not incurred to pay “qualified education expenses”; or perhaps the loan was not for attendance at an “eligible education institution” because the school was not accredited under Title IV of the Higher Education Act. All these are requirements imposed by section 221(d) of the Internal Revenue Code. Failure of a private student loan to meet any of these criteria means that the loan is fully dischargeable, because it would not qualify under section 523(a)(8) of the bankruptcy law.

Because section 523(a)(8) incorporates requirements contained in section 221(d) of the Internal Revenue Code, persons filing for bankruptcy and owing private student loans should carefully review section 221(d) with their attorney to determine if such loans are dischargeable. Section 221(d) is lengthy, and it imposes many requirements which must be met before a loan can qualify as a student loan. If your loans fail to meet these criteria, you may be able to discharge them in your bankruptcy.

The site won't allow me to post a direct link but it can be found... bankruptcylawnetwork "student-loans-maybe-they-can-be-discharged-after-all"

The loan in question was taken under the presumption it was to be used for tutition. That didn't happen. I know for a fact that $$$ wasn't used for school, and if it was very little as her attendance was spotty but I can verifty with the register's office tomorrow. If I can prove the loan wasn't used by the guidelines in the Internal Revenue Code is it possible that the discharge of this loan in my 2005 Chapter 7 filing will be recognized? I'm going to the local IRS office tomorrow and have them look up the Code before I bring this matter to the attention of the attorney that filed my Chapter 7.

[LadyInTheRed]

I highly doubt that the student's failure to use a qualified loan for the intended and agreed purpose will make the loan dischargeable. Even if it does, the next move would be for the creditor to object to discharge because the loan was incurred through fraud.

[HHM]

It's not.

These are very technical exceptions; also, none of the exceptions apply to "how" the borrower used the funds. It is whether the loans were intended for the "qualified" purpose.

Don't confuse "intent" with "reality." You can prove up and down, and sideways, how the funds were used...that doesn't matter. It is whether the intent of the loans meets the purpose. What you really need to do is get a copy of the NOTE.

Nice try, but fail.

[MothAudio]

I highly doubt that the student's failure to use a qualified loan for the intended and agreed purpose will make the loan dischargeable. Even if it does, the next move would be for the creditor to object to discharge because the loan was incurred through fraud.

Seeing the co-signer is the one that's pursued the discharge and had nothing to do with how the borrower allocated the loan how are they fraudulent? I was neither privey, responsible or had any legal say so in how the loan was distributed.

[MothAudio]

Originally Posted by HHM

Student loans are simply non-dischargeable unless the debtor can prove one of two exceptions, either
1. The student loan is not really a student loan

In your sticky "Regardless of what anyone says... " you made this statement. How does that statement not apply to the Internal Revenue Section 523(a)(8) of the Bankruptcy Code I posted or affect my particular case? TIA.

[HHM]

Moth, I understand you are desperate, and therefore "wanting" to read anything you can in a way that benefits you.

But, the issue of how the funds were used "by the borrower" is not one of the factors. No offense, but there are people much smarter than you, and much smarter than me that have litigated these issues, your particular circumstance (at least the way you described here) wouldn't get you out from underneath the student loan.

The key phrase, (from your own post) that you are wishing didn't exist is "Incurred to..." If a borrower takes out a student loan, but instead of paying it for schools, books and yes, living expenses, and instead buys a car, that act does not change the nature of the loan.

Now, that doesn't mean you are not without hope, if you could somehow show a "mutual fraud" (good luck) that the borrower and lender colluded in someway to make the loan and both sides "knew" it wasn't really intended as a student loan, then "maybe" you have something...but simply proving how the borrower "spent" the funds is not relevant.

[LadyInTheRed]

Seeing the co-signer is the one that's pursued the discharge and had nothing to do with how the borrower allocated the loan how are they fraudulent? I was neither privey, responsible or had any legal say so in how the loan was distributed.

11 USC § 523(a)(2) provides:

a) A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt—
....
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;

It doesn't say that it must be the BK debtor who committed fraud. Besides, by co-siging the loan, you became responsible for the primary borrower's actions related to that loan. You want to take advantage of those actions on one hand, and not suffer the consequences of those actions on the other. You are grasping at straws.

You are never going to get to the point of discussing fraud anyway. Because, as HHM states, the important thing is the intended purpose of the loan, not what the student ended up spending the money on.

[LadyInTheRed]

However, not all loans incurred in connection with education costs are student loans. For a loan to fall with this section, (1) it must have been made under a government or nonprofit student loan program, or (2) it must be a qualified educational loan under section 221(d)(1) of the Internal Revenue Code, for attending an eligible education institution as defined in section 221(d)(2) of the Internal Revenue Code, and incurred for costs of attendance as defined in section 472 of the Higher Education Act.

The loan was for attendence in an eligible education institution and incurred for the costs of attendence. That is the purpose for which it was given and it was with that understanding that you co-signed the loan. Do you really think the court is now going to punish the lender and guarantor because the student did not spend the money as originally intended?

[MothAudio]

11 USC § 523(a)(2) provides:



It doesn't say that it must be the BK debtor who committed fraud. Besides, by co-siging the loan, you became responsible for the primary borrower's actions related to that loan. You want to take advantage of those actions on one hand, and not suffer the consequences of those actions on the other. You are grasping at straws.

You are never going to get to the point of discussing fraud anyway. Because, as HHM states, the important thing is the intended purpose of the loan, not what the student ended up spending the money on.

Really? They're an adult not my dependant. I was just a friend trying to help out another, not their accountant or legal guardian. I wasn't aware that simply co-signing gave me legal authority over how the loan was dispursed? If that was the case the check should have been written to me and I would have managed the account.

[MothAudio]

The loan was for attendence in an eligible education institution and incurred for the costs of attendence. That is the purpose for which it was given and it was with that understanding that you co-signed the loan. Do you really think the court is now going to punish the lender and guarantor because the student did not spend the money as originally intended?

I'm just commenting on the article and the Internal Revenue Code as it is written. All I'm saying is that one of the guidelines of the Code were not met.

[MothAudio]

Thanks HHM. I read a couple of articles that suggested there might be a possiblity of a discharge. I'm sure my case isn't unique but ATST I'm retired and have the time and inclination to pursue all possible angles.

[LadyInTheRed]

Really? They're an adult not my dependant. I was just a friend trying to help out another, not their accountant or legal guardian. I wasn't aware that simply co-signing gave me legal authority over how the loan was dispursed? If that was the case the check should have been written to me and I would have managed the account.

It gave you a legal obligation to pay back the student loan if the student didn't, regardless of how the money was spent.

[HHM]

All I'm saying is that one of the guidelines of the Code were not met.

That is your interpretation (wishful thinking) There is no guideline in the code about "how the money was actually spent."