Private Student Loan Lenders Should Take Note of Recent Ruling in Bankruptcy Case

Until recently, few people have succeeded in shedding student loan debt through bankruptcy. Courts have required the person to prove that paying back the debt imposed “undue hardship,” a task that has proven insurmountable in most cases. However, a notable change recently occurred in court that may open the door for certain student loan borrowers to obtain relief from educational debt, and private lenders should take note.

A recent judicial opinion deemed that some student loans may be dischargeable in bankruptcy. In Homadian v. Sallie Mae, the United States Court of Appeals for the Second Circuit affirmed a federal court’s decision that some private student loans are not expressly exempt from discharge in Chapter 7 bankruptcy.

Non-dischargable student loans

Student loan debt that courts view as non-dischargable include:

• Loans backed by the government or a nonprofit;
• Obligations to repay funds received as an educational benefit, scholarship, or stipend; and
• Private student loans that meet IRS guidelines that may make them tax deductible.

In the case, an alumnus from Emerson College sought to eliminate, through bankruptcy proceedings, $12,567 in private student debt that he borrowed to fund his education. The student’s lender, Navient Solutions, LLC, argued the student’s debt should be treated as an obligation to repay funds as an educational benefit.

The courts focused on the terms “educational benefits” in its determination in this case. The court found that the language refers to conditional grants that are similar to stipends and scholarships and not private loans.

“If Congress had intended to exempt all education loans from discharge, it would have not have done so in such stilted terms… There are educational benefits that students may be obligated to repay – such as conditional grants – which fit the statutory text more naturally.”

The ruling does not apply to government-funded or backed loans.

Help is available

Because of the court opinion, lenders should evaluate lending programs and consult with legal counsel regarding debtors interested in relieving student debt. The attorneys at O’Reilly Rancilio are available to answer your questions. For more information, please call 586-726-1000 or visit our website.