The 9th Circuit Bankruptcy Appellate Panel recently ruled that private student loans should be discharged in an unpublished case. In this case, James Pearson borrowed money from his parents-in-law, the Nichols, to take pre-med classes and then attend medical school. Pearson eventually filed bankruptcy and asked that the loans be discharged and the Nichols objected. The parties agreed that part of the loan was not for qualified student loan expenses. The lower Bankruptcy Court ruled that the portion of the loan which was for qualified student loan expenses was not disharged and Pearson appealed.

On appeal, the 9th Circuit BAP focused closely on the language in Bankruptcy Code § 523(a)(8)(B) and tax code § 221(d)(1). These code sections prevent a borrower from discharging a “qualified educational loan.” They define such a loan as one that is “solely” for qualified higher education expenses. Because the loan the Nichols gave to Pearson wasn’t solely, or entirely, for qualified higher education expenses, the 9th Circuit BAP reversed the lower court and ordered that the entire student loan should be discharged.

If you have a private student loan that wasn’t entirely used on qualified higher education expenses, you may be able to discharge the entire loan in bankruptcy.