GOVERNMENT LOAN DEBT AND BANKRUPTCY

Most loans issued by the government or a municipality can be discharged in a bankruptcy case. In my experience, a common misperception about bankruptcy is that any debt associated with the government cannot be discharged in a bankruptcy filing. Actually, the opposite is probably closer to the truth. Considering all the loans that could be governmentally issued, the broad majority of those loans are in fact, dischargeable in a bankruptcy filing.

First, it is important to distinguish or classify the benefits received from the government to determine whether the debt is actually a loan. Loans could be generally referred to as money given to someone with an expectation or commitment that the money given is repaid at some point in the future. Taxes levied by a governmental body are not originated by money given to someone, nor are fines, tickets, citations, or penalties. Governmental grants, sometimes referred to as aid or assistance, carry no expectation of repayment. Unemployment and social security benefits too are not given with an expectation that these benefits are repaid. Ultimately, there must be some amount of money loaned.

Whether a loan is subject to discharge depends on a number of factors. First, remember that Chapter 7 and Chapter 13 bankruptcies will only discharge unsecured debt. As discussed elsewhere, a loan secured by collateral is not subject to discharge unless the collateral is surrendered. A secured loan can only be discharged by making the loan unsecured. Surrendering the security that makes the loan secured will make the loan unsecured, and therefore, subject to discharge. VA Loans and HUD Loans are commonly secured by real estate or personal property. As such, unless you would be willing to surrender the collateral, these loans must still be paid.

Easily the three most common loans issued by the government are student loans, Small Business Administration (SBA) loans, and Veterans Administration (VA) loans.

Student loans are probably the loan that most people have received from the government. Unfortunately, student loans are almost always non-dischargeable in a bankruptcy filing. Whether the loan was issued by the Federal or State government makes no difference. Even those student loans issued by private banks are, by statute, not subject to discharge in a bankruptcy. On extreme rare occasions, student loans may be discharged upon a showing of permanent disability accompanied by absolutely no possibility of repayment to the lender (this is the definition of “undue hardship” in several federal circuits). Discharging student loans is rare, and often considered the urban myth of bankruptcy law.

With student loans out of consideration, nearly all other loans from the government are dischargeable in a bankruptcy filing. It does not matter the amount of the loan or the age of the loan for SBA loans. Even if the SBA loan was obtained to start up a business and the business failed quickly, the SBA loan can still be discharged in a bankruptcy. If you are attempting to discharge a VA loan, it doesn’t matter if you are receiving monthly VA Benefits or VA disability benefits. A loan issued by the VA is still dischargeable.

In the simplest terms, outside of student loans, most any loan issued by the government is subject to discharge.

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