In general, filing for bankruptcy can eliminate most types of debts. One major exception to this rule is for student loans which are usually excepted from discharge unless the borrower can demonstrate an “undue hardship”. The exception to discharge for student loans has generally been interpreted to apply to both public and private student loans. However, in a recent decision, Homadian v. Navient Solutions, LLC, United States Court of Appeals for the Second Circuit interpreted the Bankruptcy Code provisions dealing with student loans narrowly and found that private student loans are dischargeable in bankruptcy.
Section 523(a)(8) of the Bankruptcy Code excepts from discharge three specific categories of educational debt: (i) an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funding in whole or in part by a governmental until or a non-profit institution; (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or (iii) any other educational loan that is a qualified education loan, as defined in section 221(d)((1) of Internal Revenue Code.
In the Homadian case, the borrower received two private “Tuition Answer Loans” from a for-profit company, Sallie Mae, Inc., to which Navient Solutions was the successor in interest. Although the borrower conceded that the loans helped to pay for his college education, the loan itself did not require any portion of it to be used for educational purposes. The loans were not made through his school’s financial aid office and were not paid directly to his school. Rather, the loans were deposited directly into the borrower’s bank account with no restrictions on how the proceeds were used.
After graduating, the borrower filed for Chapter 7 bankruptcy and received a discharge of his debts. Navient however hired a collection agency to attempt to collect the Tuition Answer Loans on the belief that they had been excepted from the borrower’s discharge under the exception for student loans. The borrower too believed that since Navient was still trying to collect the debt, that it had not been discharged in his bankruptcy case. He ultimately repaid the loans in full but, after doing so, he reopened his bankruptcy case and filed a complaint against Navient, claiming it had violated his discharge by misleading him into believing the loans had not been discharged.
The Bankruptcy Court for the Eastern District of New York agreed, finding that the loans had in fact been discharged. Navient appealed to the Second Circuit Court of appeals which upheld the ruling. On appeal, Navient conceded that the loans were not made or guaranteed by any governmental unit, they were not “qualified education loans” and were not funds received as a scholarship or stipend. Therefore, the only issue in the appeal was whether the loans constituted “an obligation to repay funds received as an educational benefit.” The borrower argued that the loans did not constitute an obligation to repay funds received as an educational benefit. In the borrower’s view, the phrase encompassed only a “narrow category of conditional grant payments” not all student loans. Navient, in contrast, asked the court to interpret this language so broadly as to encompass all private student loans.
The Court rejected Navient’s argument finding that the statutory language section omitted the word “loan” entirely and that there was no indication that Congress had intended to exclude such a broad category of debts from discharge in bankruptcy. The court observed that the phrase “an obligation to repay funds received as an educational benefit” is an “unconventional way to describe a loan.” This was particularly true where the two other categories of student loan debt excluded under Section 523(a)(8) specifically refer to “educational loans.” The better reading of that statute, the Court found, is that it excludes debts such as an obligation to repay a conditional education grant. This reading was consistent with the rest of the clause applying to stipends and scholarships.
The Homadian decision is a win for borrowers who are struggling to pay private student loans. Importantly, this case was initiated years after the borrower filed for bankruptcy suggesting that other individuals with private student loans who have already filed for bankruptcy but mistakenly believed their private student loans were not discharged may now be able to get out from under them without having to file bankruptcy again.
If you are struggling to deal with private student loans and want to learn more about whether bankruptcy can help, or if you’ve previously filed bankruptcy but believed your private student loans were not discharged, call the Lipton Law Group at 508-202-0681 for a free consultation.