Borrowers are beginning to win battles to erase some student loans in bankruptcy court, overcoming stiff obstacles that have generally blocked that path except in extreme cases of financial hardship, the Wall Street Journal reported today. Since March, several bankruptcy courts have allowed borrowers to cancel private student loans with a new legal argument that relies on vague wording about the legal definition of a student loan. Without proving extreme hardship, the Bankruptcy Code says that a borrower can’t discharge a loan made for an “educational benefit.” This language has opened a window to cancel loans for students who argue that their loans falls outside this category of debt. Such reasoning has been applied to loans obtained to attend schools without accreditation or to study for a bar exam. The argument only applies to a slice of the private student-loan market, which makes up less than 10 percent of the more than $1.3 trillion in outstanding student debt. The federal government dominates the student-loan market and isn’t as vulnerable in bankruptcy proceedings. Read more. (Subscription required.)
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