Circuit Two argues that certain private student loans may be dischargeable under Section 523 (a) (8) (A) (ii) – Insolvency / Bankruptcy / Restructuring

United States: Circuit 2 argues that certain private student loans may be dischargeable under section 523 (a) (8) (A) (ii)

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The situation: In Homaidan v. Sallie Mae, Inc., et al., the United States Court of Appeals for the Second Circuit recently stated that certain types of private student loans are not “bonds[s] to repay funds received as educational benefits, scholarships or allowances “which are exempt from discharge in bankruptcy in the absence of undue hardship.

The result: This decision brings the second circuit into line with the fifth and tenth circuits on this issue. However, neither the bankruptcy court decision below nor the second circuit decision on appeal determined the circumstances under which loans may be discharged in bankruptcy pursuant to 11 USC § 523 (a) (8) ( A) (i) or 523 (a) (8) (B).

Looking forward: Private student loans may still be dischargeable under section 523 (a) (8) (A) (i) or 523 (a) (8) (B) as “qualifying student loans”, which the court in Homaidan did not consider. Nonetheless, in the wake of the COVID-19 pandemic, bankruptcies involving overdue and overdue student loan debts are likely to increase, and this precedent aligns the second circuit with the fifth and tenth circuits and could lead to more disputes over find out if these debts can be discharged. And on August 2, 2021, the bipartisan NEW START thanks to the bankruptcy law of 2021 was announced for presentation to the Senate. This bill aims to help borrowers in difficulty by amending the provisions of the Bankruptcy Code which govern the release of student loans. Market players should continue to monitor these developments.

On July 15, 2021, a panel of three judges of the United States Second Circuit Court of Appeals was held in Homaidan v. Sallie Mae, Inc., et al. that the private student loans in question were not subject to the exemption from discharge provided for in section 523 (a) (8) (A) (ii) of the Bankruptcy Code for “obligation[s] to repay funds received as an educational benefit. In the bankruptcy court case below, the defendant Lender and Manager (hereinafter, “Lender”) sought the dismissal of an adversarial proceeding brought by a debtor in Chapter 7 bankruptcy alleging that the lender had violated a bankruptcy discharge order by accepting repayment of private student loans that were in fact discharged because they covered more than eligible educational expenses. The defendant argued that the loans were exempt from discharge.[s] to repay funds received as an educational benefit “under section 523 (a) (8) (A) (ii) of the Bankruptcy Code and found that it” does not wipe out all debts related to the education, “including the student loans at issue. He therefore dismissed the defendant’s motion to dismiss. The Second Circuit allowed the interlocutory appeal and upheld.

The decision of the second circuit

Like the bankruptcy court, the Second Circuit relied heavily on the plain language of the relevant legislation, which exempts from discharge, inter alia, “the obligation[s] to reimburse funds received as an education allowance, scholarship or allowance. “Decision at 9; see also 11 USC § 523 (a) (8) (A) (ii). The only argument of the defendant lender in its motion to dismiss was that the private student loan granted to the plaintiff was an “educational benefit” under section 523 (a) (8) (A) (ii). However, the Respondent reserved the right to respond to the Applicant’s allegations that the loans were not “qualifying student loans.[s]”under Section 523 (a) (8) (B) at a later point in the litigation.

The Second Circuit concluded that Section 523 (a) (8) (A) (ii) cannot be interpreted to include “loans” where that specific word has been used in related provisions and specifically absent from the sub. -applicable part. The court also noted that it could not adopt the defendant’s broad interpretation of the provision – “under which any loan is non-dischargeable under section 523 (a) (8) (A) (ii ) if it was used for further education -[as it] would draw virtually all student loans under the exemption. This, according to the court, would unduly render the exemptions in sections 523 (a) (8) (A) (i) and 523 (a) (8) (B) meaningless. limited by the court to align with the terms “scholarship” and “allowance” also specified in section 523 (a) (8) (A) (ii). Because the appeal arose out of a decision on a motion to dismiss, the court did not rule on the actual release of the applicant’s loan in connection with his bankruptcy and referred the case back to the bankruptcy court. for further processing.

Impact on future litigation

The Second Circuit decision does not completely clarify the rules surrounding the release of student loans. Indeed, the court did not consider whether the private student loans in question were “eligible student loans”.[s]”and therefore not subject to discharge under Section 523 (a) (8) (B). In addition, the decision does not at all involve public student loans, which are exempt from discharge in the absence of conclusions that the payment of the debt would cause the debtor “hardship.” In Thelma G. McCoy v. United States, a plaintiff recently requested a writ of certiorari from the United States Supreme Court to resolve a circuit split regarding the appropriate test to assess “undue hardship.” However, in June 2021, the court dismissed the petition, leaving the divided circuit intact and opening the door to pursuing inconsistent decisions.

Four key points to remember

  1. Homaidan argues that the private student loans at issue are not “bonds[s] to reimburse… education benefits ”, which cannot be discharged in the event of bankruptcy. However, Homaidan did not consider the private student loan exemption to be an “eligible student loan[s]”under Section 523 (a) (8) (B).
  2. Prospective litigants may be able to use the other provisions of 11 USC § 523 (a) (8) to argue that a student debt is dischargeable.
  3. The decision of the Second Circuit to align with the Fifth and Tenth Circuits could lead other debtors, including those affected by the COVID-19 pandemic, to request the discharge of their student loans.
  4. Market participants should also monitor developments regarding the FRESH START Through Bankruptcy Act of 2021 and any other proposed legislation which, if passed, would amend the provisions of the Bankruptcy Code governing the discharge of student loans.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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