Last month, the United States Court of Appeals for the Second Circuit, in Homaidan vs. Sallie Mae, Inc., 3 F.4th 595 (2d Cir. 2021), upheld a New York federal court’s ruling that private student loans are not explicitly exempt from discharge in a Chapter 7 bankruptcy, opening the door to more borrowers seeking student debt relief.
In the ruling, the Second Circuit sided with an Emerson College alumnus who was seeking to eliminate through bankruptcy the $12,567 in private student loans he took out to fund his education. Government-backed student loans are almost impossible to erase in the event of bankruptcy. To qualify, borrowers must demonstrate that continuing to repay would impose “undue hardship,” a standard so high that few even attempt to meet it. This student’s lender, Navient Solutions LLC, argued that its private loans should be treated the same way. But the Second Circuit disagreed, saying certain types of private educational loans can be canceled through the bankruptcy process without undue hardship.
In the opinion written by US Circuit Court Judge Dennis Jacobs, the three-judge panel decided that Section 523(a)(8) of the US Bankruptcy Code does not provide a general exception to the applicability of a Discharge from Bankruptcy to Private Loans to Student Borrowers.
Subsection A(ii) of Section 523(a)(8) allows exclusion from the discharge of an “obligation to repay funds received as an educational benefit, scholarship, or stipend”, and Navient argued in the lower court proceeding that this covered private student loans made to the debtor here.
According to the court, interpreting subsection A(ii) as applying to loans made by Navient would have the effect of exempting virtually all types of student loans from bankruptcy discharge: “According to Navient’s interpretation of this provision, the term ‘educational benefit’ would encompass virtually all private student loans”, “But this reading cannot be reconciled with the text and structure of Section 523(a)(8) , both of which confirm that Section 523(a)(8)(A)(ii) excludes from discharge a much narrower category of debts.”
In its analysis, the Appeals Panel looked only at the text of the code to determine whether Navient’s loans to the debtor were covered by the relevant sections of the code. It determined that only three types of loans are exempt from the discharge: loans and benefit overpayments guaranteed by the government or a nonprofit; obligations to repay funds received as an educational benefit, scholarship or stipend; and qualified private educational loans.
Navient argued that its loans fall under the second criterion for exemption, specifically as an educational benefit. But the court determined that if Congress had intended this passage to cover private student loans, it would have said so more explicitly by adopting the wording of the code section:
[I]f Had Congress intended to exclude all student loans from discharge under Section 523(a)(8)(A)(ii), it would not have done so in terms also stuffy… There are educational benefits that students may be required to repay – such as conditional grants – that fit more naturally with the legislative text.
The Second Circuit decision joins the ranks of at least two other circuit court opinions — the Fifth and Tenth Circuits — in reaching this conclusion. See In re Crocker, 941 F.3d 206 (5th Cir. 2019), as revised (Oct 22, 2019) (stating that the term “educational benefit”, as used in the release exception, derived its meaning from the terms around it and could not be construed broadly enough to include private educational loan); In re McDaniel, 973 F.3d 1083, 1086 (10th Cir. 2020) (idem).
As a result, using these rulings to buttress their position, more and more borrowers may attempt to free themselves of their private student loans through bankruptcy cases.