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Student Loans Forgiven Through Bankruptcy? Why You May Be Entitled to Money Back

Nuthawut Somsuk / Getty Images/iStockphoto
Nuthawut Somsuk / Getty Images/iStockphoto

The Consumer Financial Protection Bureau (CFPB) is taking steps to ensure that unlawfully collected student loan debt discharged in bankruptcy is returned to borrowers.

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On March 16, the CFPB released a bulletin after examiners found that some private student loan servicers did not determine whether a loan was discharged and continued to bill and collect payments. The CFPB said that certain loan servicers illegally sent loans to collections after bankruptcy courts discharged the loans.

“When a court orders the discharge of a loan, lenders and servicers should not treat this as a suggestion,” CFPB director Rohit Chopra said in a press release. “The CFPB has found that some servicers are ignoring bankruptcy court orders. The student loan servicing industry should ensure that their collection practices are compliant with the law.”

The CFPB is ordering these servicers to return illegally collected payments and cease unlawful collection tactics. The bulletin also says the agency will examine servicers handling these loans to see if these practices continue at other companies. The CFPB did not explicitly name which companies are engaging in these unfair practices.

After private student loans go to collections, you can get them discharged through a Chapter 7 bankruptcy, but they must meet the “undue hardship” standard.

However, many borrowers don’t realize that private student loans can be discharged without a separate hearing if they are considered “non-qualified higher education expenses,” reported Yahoo Finance. For example, loans that were given to borrowers who attended less than half-time or loans given over the cost of attendance that were disbursed directly to the borrower.

According to an investigation conducted by the Student Borrower Protection Center (SBPC) in 2022, lenders and loan servicers made false representations when they claimed that $50 billion in private student loans — which were held by 2.6 million borrowers — were ineligible for bankruptcy discharge, added Yahoo Finance.

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Natalia Abrams, founder of the Student Debt Crisis Center, told Yahoo Finance that these companies are taking advantage of vulnerable individuals — and that it’s reassuring to see the CFPB hold these companies accountable and protect consumers from harm.

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This article originally appeared on GOBankingRates.com: Student Loans Forgiven Through Bankruptcy? Why You May Be Entitled to Money Back