2nd Circuit says private student loans can be discharged in bankruptcy


Bankruptcy law

2nd Circuit says private student loans can be discharged in bankruptcy

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Student loans issued by the private sector can be discharged in bankruptcy, a federal appeals court has ruled.

In his decision On Thursday, a three-judge panel of the 2nd U.S. Court of Appeals in New York City upheld a bankruptcy court dismissal of Navient Solutions’ motion to dismiss a case brought by a borrower who argued that its private educational loans had been released from bankruptcy.

The student loan manager claimed that a provision in the United States Bankruptcy Code prevents a borrower from fulfilling its “obligation[s] to repay funds received as an educational benefit, scholarship or allowance. The panel, however, said that according to this reading, the “term ‘educational benefit’ would encompass virtually all private student loans.”

The panel wrote that the provision in question “excludes from discharge a much narrower category of debt”.

Reuters, Law.com, Law360, Bloomberg Law and Forbes record of the decision.

Hilal K. Homaidan took out two Tuition Response Loans from Sallie Mae, a company to which Navient is the successor, to finance his studies at Emerson College. According to the panel’s opinion, he filed for Chapter 7 bankruptcy with the U.S. Bankruptcy Court for the Eastern District of New York after graduating in 2007.

He received a discharge order from the bankruptcy court, but it did not specify whether his tuition response loans had been discharged. The notice says he later heard from a collection firm Navient hired that he had to repay those loans. He assumed they had not been released and reimbursed Navient “mistakenly believing he had a legal obligation to do so”.

Homaidan decided to reopen its bankruptcy case in 2017, to determine whether its tuition response loans were discharged during the initial proceedings. The notice says he then filed a putative class action lawsuit against Navient, alleging that the student loan manager “used a system of granting dischargeable loans to unsuspecting student borrowers and then demanding repayment even after the discharge of these loans in bankruptcy “.

In its decision, Circuit 2 agreed with the bankruptcy court’s conclusion that interpreting “an obligation to repay funds received as an educational benefit” to include student loans would be “an unconventional way of discussing a ready”.

“If Congress had intended to exclude all educational loans from the landfill [under this provision], he wouldn’t have done it in such stilted terms, ”the panel wrote. “There are educational benefits that students may be forced to repay, such as conditional scholarships, which more naturally correspond to the statutory text. “

The 2nd Circuit ruling puts it in line with the New Orleans-based 5th US Court of Appeals and Denver-based 10th US Court of Appeals, which have also rendered rulings on loans private students. It did not apply to loans guaranteed by the government.

George Carpinello, partner in Boies Schiller Flexner’s Albany, New York office, represented Homaidan. He told Reuters Thursday’s decision was important for people who believed their private student loans could not be discharged in bankruptcy.

“What is really glaring about this is that Navient has been telling people for years that their loans are non-dischargeable when in fact they are dischargeable,” Carpinello said.

In a statement released by Law.com, Navient said the appeal “relates to only one issue in the case” and that he “has made several defenses and looks forward to presenting those defenses as they arise. as the case progresses “.

The company also said it recognizes “that some student borrowers face long-term financial challenges, and that is why, for several years, Navient has recommended bankruptcy reform that would allow federal and private student loans. to be discharged in the event of bankruptcy after having made a good faith effort to repay.