I took out a loan from an unaccredited vocational school. Can I discharge the loan in bankruptcy?

Loans made by unaccredited schools can be wiped out in bankruptcy without proving hardship.

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Question

Several years ago I attended a vocational school to become an auto mechanic. I took out a loan from the school itself in order to cover the tuition. (I didn’t get any federal loans or grants.) The education I received was terrible, and I was unable to find work as a mechanic. I’m still a low-paid dishwasher. I later learned that the school was unaccredited. I still owe quite a bit on that loan. If I file for bankruptcy, can I discharge the debt?

Answer

You should be able to discharge your loan from the vocational school without being subject to the special rules governing most other types of student loans.

Special Dischargeability Rules for Student Loans

When it comes to most types of student loans, you cannot discharge them in bankruptcy unless you bring a separate action within your bankruptcy case (called an adversary proceeding) and prove to the court that paying your loans would cause you or your dependents undue hardship.  This is not an easy standard to meet. (Learn more about the undue hardship standard for discharging student loans in bankruptcy.)

Loans From Unaccredited Schools Don’t Fit Within the Special Rules

However, in order to discharge your loan from the vocational school, you shouldn’t have to prove undue hardship. It should be discharged along with your other unsecured debt. Here’s why.

The special student loan bankruptcy rules apply to any “qualified education loan.” A qualified education loan is defined in the tax code as any loan incurred to pay for qualified education expenses, which are the costs of attending an “eligible institution.”  Eligible institutions are those that can participate in financial aid programs. Although most schools are eligible for these programs (and therefore, most student loans are subject to the special bankruptcy rules), unaccredited school are not.  This means your loans are not “qualified education loans.”

Because you don’t have to meet the undue hardship test to discharge your loans, they should be wiped out along with your other unsecured debt.

Get a Bankruptcy Lawyer

Convincing the court that you don’t have to prove undue hardship may take some legal argument.  If discharging these loans is an important goal in your bankruptcy, get help from a bankruptcy attorney experienced in dealing with student loan issues. 

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