You borrowed a private student loan to pay your tuition at a for-profit truck driving school. You thought you’d be able to pay back the loan. But, at some point, life happens. And when it does, you may consider filing bankruptcy.
As you already know, your debts for credit cards, medical expenses, repossessions, etc. go away (i.e., they’re discharged) when your case ends. But what about the loan you borrowed to attend truck driving school? Can you get it discharged without having to prove that repaying the loan would cause you an undue hardship?
Here’s what I mean.
It’s possible that the Bankruptcy Code’s exception to discharge provision — 11 U.S.C. § 523(a)(8) — doesn’t protect your truck-driving school loan from discharge. If that’s true, then that truck driving school loan is no different than you credit card debt: it can be discharged without filing an adversary proceeding.1
Here’s how you may be able to get your truck-driving school loan discharged in bankruptcy.
Considerations before you file
When you file bankruptcy, your bankruptcy attorney will question you about your creditors. Your attorney will use answers and your credit report and bills to complete schedules D and E/F.
Schedule D lists your secured creditors (mortgage, car note, financed furniture, etc.). Schedule E/F lists both your unsecured priority creditors (tax debt, child-support, alimony, etc.) and unsecured nonpriority creditors (credit cards, evictions, and student loans).2
For student loan purposes, how Schedule D is completed usually isn’t a relavant — student loans are typically unsecured debt — so let’s focus on Schedule E/F. When listing your priority and nonpriority creditors, that schedule asks that list the creditor’s name, the amount owed, the account number, the date the account was created, and what was the consideration for the debt3 and whether the debt is a student loan.
When I complete schedule E/F for my clients with a truck driving school loan, here’s what I do:
- I list the creditor’s name, the amount owed, the date the loan was originated, and the account number.
- I describe the consideration for the debt as an “installment loan”.
- Under “Type of NONPRIORITY unsecured claim”, I leave the box next to student loan unchecked.
Installment loan & the unchecked box
You may wonder why I describe the private student loan as an “installment loan” instead of a “student loan”.
I do that for one reason: to protect my client.
Let’s say my client files an adversary proceeding to discharge the loan. If that happens, I don’t want the creditor to offer schedule E/F as evidence that my client agreed that the loan is a “student loan” and should therefore be nondischargeable absent undue hardship.
The same thinking applies to my decision to leave the student loan box “unchecked”.
Why concede something if you don’t have to?
Considerations after you file
After you commence your bankruptcy case and list the loan on your schedules, you have two options:
- File an adversary proceeding to discharge the loan or
- Do nothing
In my experience, borrowers usually desire the first option. They want to file an adversary shortly after they file their case. In some respect, filing quickly makes sense. You have the momentum from filing bankruptcy. Now you want to ensure your fresh start by getting rid of that truck driving loan.
But here’s the thing.
You may be able to avoid filing an adversary proceeding and still get rid of the loan.
Here’s what I mean.
Absent undue hardship, a student loan that meets the requirements of § 523(a)(8) is nondischargeable by operation of law. What that means is that a lender with a student loan that meets the requirements of § 523(a)(8) need not do anything for its loan to be excepted from discharge. The law — Section 523(a)(8) — does that for the lender automatically.
Notice though what I said: a student loan that meets the requirements of § 523(a)(8)….
If the loan doesn’t meet that section’s requirements, then the loan was discharged with your debts. And it was discharged by operation of law. There’s no need for you to file an adversary proceeding.
Of course that leaves you wondering:
How do I know if my truck driving loan was discharged?
The answer is you don’t. You assume. You believe. Unless you have a ruling from a judge, you don’t know for sure. But neither does your lender.
And there’s the rub.
Doing nothing leaves both you and the lender in limbo
Sometimes that letter is enough to halt the collection attempts.
Other times it isn’t.
Maybe that uncertainty isn’t for you.
If you do, you’ll have to pay for it by…
Filing an adversary to declare the truck driving school loan discharged
Although it has a fancy name, an adversary proceeding is simply a lawsuit in bankruptcy court.
Unlike student loan lawsuits in state court — for example, lawsuits filed by National Collegiate Student Loan Trust or The Scholarship Foundation of St Louis — the purpose of the adversary proceeding isn’t to determine whether you’re obligated to repay the debt. (Both you and the lender likely will assume that to be true.) Instead, the purpose is to declare the loan discharged as part of your bankruptcy.
As I mentioned earlier, you have two options to argue the debt should be discharged.
One option is to argue that repaying the debt will cause you or your dependent an undue hardship.
Another option is to argue the loan wasn’t excepted from discharge because it doesn’t meet the requirements of § 523(a)(8).4
Proving undue hardship can be challenging. Some courts say you have an undue hardship if you prove:
- an inability to maintain a minimal standard of living for you and your dependents;
- a likelihood that that inability will remain for a significant portion of the repayment period of your loans; and
- a good faith effort on your part to try and repay your loans.
In comparison, proving the truck driving school loan is outside the scope of § 523(a)(8) should be a lot easier. You don’t have to worry about satisfying a subjective test. Instead, you need prove only two things:
- The loan isn’t a qualified education loan within the meaning of section 221(d) of the Internal Revenue Code.
- The loan isn’t an “obligation to pay funds received as an educational benefit, scholarship, or stipend.”
I’ve already written in-depth articles discussing when a loan is excepted from discharge as a qualified education loan and why a loan isn’t an education benefit within the meaning of § 523(a)(8)(ii). So rather than rehash that information here, let’s turn our attention to the bankruptcy cases involving the dischargeability of private student loans borrowed to attend for-profit truck driving schools.
Private student loans and for-profit truck driving school dischargeability cases
My research unearthed only a few cases where bankruptcy courts discussed the dischargeability of for-profit truck driving school loans. Those cases were all decided before the 2005 BAPCPA amendments, which added discrete subsections to § 523(a)(8).
While on the surface, the lack of a post-BAPCPA case looks like a potential hurdle. It isn’t. The reasoning those courts used in discharging the for-profit truck driving school loans still holds up.
Here are those cases:
- Scott v. Midwestern Training Center (In re Scott), 287 B.R. 470 (Bankr. E.D. Mo. 2002) (rejecting the lender’s argument that a loan is an “obligation to repay funds received as an educational benefit…” while explaining by example that “such an obligation would be for funds received as grants that must be repaid only under certain conditions (like the failure of a medical student grant recipient to practice in a physician shortage area after graduation))
- Jones v. H & W Recruiting Enterprises, LLC (In re Jones), 242 B.R. 441 (Bankr. W.D. Tenn. 1999) (adopting the reasoning from In re Meinhart and holding that a student loan debt owed to a strictly for-profit educational related lender was discharged)
- United Resource Systems, Inc. v. Meinhart (In re Meinhart), 211 B.R. 750 (Bankr. D. Colo. 1997) (reasoning that equating a private loan with an “educational benefit, scholarship, or stipend” would render the rest of the statute meaningless)
- McClure v. Action Career Training (In re McClure), 210 B.R. 985 (Bankr. N.D. Tex. 1997) (“Although Congress expanded the reach of [§ 523(a)(8)]…there is no indication that Congress intended any of the amendments to apply to for-profit businesses in no way connected to the government guaranteed student loan program…The legislative history shows that the statute is a protective measure designed to safeguard the United States Treasury and keep student loan programs intact.”)
Thoughts on truck-driving school loans after BAPCPA
Although I’ve found no post-BAPCPA case law, I imagine that if a similar case to those above were brought today, the truck driving school would argue:
(a) its loan is a qualified education loan protected from discharge under § 523(a)(8)(B) and/or
(b) the loan is an educational benefit within the meaning of § 523(a)(8)(A)(ii).
In my opinion, the first argument is more likely to lead to success than the second. The second argument has already been shown to be a loser. The courts rejected the educational benefit argument in In re Scott, In re Jones, In re Meinhart, and In re McClure.
As for the first argument — the for-profit truck driving school loan as a qualified education loan — that argument may have some legs if the truck driving school participated in the federal student aid program at the time you borrowed the loan. If it did, then the loan may not be dischargeable. And if it didn’t, the loan should be declared discharged.5
Given the right facts, private student loans borrowed to attend a for-profit truck driving school may be discharged without proving undue hardship. It takes some work. It takes some thinking. And it may even take some arguing. But still, it can be done.
File an AP to find out for yourself. What do you have to lose?
Of course, you could always file a declaratory action as part of an AP. But in that case, you’re not arguing the loan is causing you or your dependents an undue hardship. Rather, you’re asking the court declare that § 523(a)(8) doesn’t protect the loan from discharge.↩
Whether a debt is a priority debt or a nonpriority is a distinction made in bankruptcy. Without going into much detail, the difference between the two is that a priority debt gets paid before a nonpriority debt gets paid.↩
In this context, consideration means the description of what the debt was for (credit cards, medical expenses, etc.)↩
You can, of course, argue the loan is excepted from discharge and, in the alternative, repaying it would cause you an undue hardship.↩
This simple “federal student aid program participant” test derives from the IRS Code and Higher Education regulations that § 523(a)(8)(B) refers to.↩