Student loans are typically not discharged in bankruptcy cases. Credit cards, on the other hand, can be discharged in bankruptcy. Recent graduates with large amounts of student loan debt may be tempted to use cash advances on credit cards in order to pay off student loans, and then filing bankruptcy and discharging the debt. However, there are several good reasons not to convert educational loans to credit card debt.
A refinanced qualified education loan is still considered a qualified education loan for the purpose of determining dischargability in bankruptcy. Even though the debt is now on a credit card it may not be discharged in bankruptcy. Additionally, incurring new debt with the intention of filing bankruptcy and discharging it without repayment is fraud. In this type of situation the credit card company can file a lawsuit in the bankruptcy court, called an adversary proceeding, seeking to have the debt excepted from discharge. In the end the debtor may still owe the credit card debt, which will probably be incurring a higher interest rate than the education loans they paid off, and also have to pay the attorney’s fees and court costs incurred by the lender.
In practice the creditor would have to be paying attention to realize that the debtor committed fraud. Lenders see so many bankruptcy filings that there is a chance that they will never notice the charges. However, if the lender does become aware of the debtor’s fraud, then there is very little chance of the debtor succeeding in the lawsuit brought against him in the bankruptcy court. The debtor would have to put forth a good reason for why the student loans were paid off with credit cards. If the interest rate is higher on the credit cards, then transferring the funds to the cards would seem to be a bad financial decision. Under those circumstances it would be very difficult to prove that the debtor did not intend to defraud the lender. The bottom line is that it is best to avoid going down this path. It usually doesn’t end well.