Appeals Court Rules Some Private Student Loans can be Discharged in BK

The Court of Appeals for the Second Circuit has upheld a lower court’s ruling allowing a plaintiff’s private student loans to be discharged as part of his bankruptcy filing, ruling that the provision of the bankruptcy code that prohibits the discharge of “an obligation to repay funds received as an educational benefit” does not apply to loans.

A copy of the ruling in the case of Homaidan v. Navient can be accessed by clicking here.

The plaintiff obtained private student loans, graduated from college, and then filed for Chapter 7 bankruptcy protection. The defendant continued to try to collect on the loans after the plaintiff’s bankruptcy was discharged. The plaintiff eventually repaid the loans in full, but then reopened the bankruptcy filing and sued the defendant, alleging it violated the discharge order. A Bankruptcy Court judge denied a motion to dismiss filed by the defendant, determining that the loans were not excepted from discharge, which the defendant appealed to the Second Circuit.

The defendant was accused of “issuing dischargeable loans to unsophisticated student borrowers and then demanding repayment even after those loans are discharged in bankruptcy.”

The relevant section of the bankruptcy code lays out three types of student loans that can not be discharged under bankruptcy. One are government student loans, the other are qualified education loans, and the third are obligations “to repay funds received as an educational benefit, scholarship, or stipend.” It is this category that the defendant argues its loans falls into.

But the Second Circuit failed to see a private student loan as being the same thing as “an educational benefit.” As it wrote in the ruling, “… if Congress had intended to except all educational loans from discharge under § 523(a)(8)(A)(ii), it would not have done so in such stilted terms.”

Applying the laws of statutory construction and legal canon, the Second Circuit ultimately decided that since the phrase “educational benefit” was placed alongside the words “scholarship” and “stipend,” that the terms were meant to be used similarly, in which case an educational benefit could not be construed as a loan.

“Interpreting ‘educational benefit’ to cover all private student loans when the two terms listed in tandem describe ‘specific and quite limited kinds of payments that . . . do not usually require repayment,’ would improperly broaden
§ 523(a)(8)(A)(ii)’s scope,” the Appeals Court wrote.

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