Debtors Can Cancel Private Student Loans in Bankruptcy Soon at a Circuit Near You

In what appears to be good news for those with student loan debt, the Tenth Circuit recently joined the Fifth Circuit in ruling that certain private student loans are dischargeable in bankruptcy.

In McDaniel v. Navient Solutions, LLC, No. 18-1445 (10th Cir. Aug 31, 2020), the Tenth Circuit held that an educational loan does not constitute “an obligation to repay funds received as an educational benefit” under Section 523 ( a) (8) (A) (ii) of the Bankruptcy Code.

Article 523 (a) (8) of the Code provides, in a relevant part:

  1. A discharge under this title does not discharge an individual debtor from any debt –

(8) unless excluding such debt from discharge under this paragraph would impose undue hardship on the debtor and his dependents, to:

(A) (i) an overpayment of educational allowances or a loan made, insured or guaranteed by a government unit, or made under any program financed in whole or in part by a government unit or an institution for non-profit ; Where

(ii) an obligation to repay funds received as an educational benefit, scholarship or allowance; Where

(B) any other student loan that is an eligible student loan, as defined in section 221 (d) (1) of the [IRS Code], incurred by a debtor who is a natural person.

In McDaniel, debtors borrowed over $ 100,000 in private loans for college living expenses. These loans were not qualified student loans, nor were they made or guaranteed by any government unit or non-profit institution. Whether the loans were dischargeable was therefore left to the interpretation of the Tenth Circuit of § 523 (a) (8) (A) (ii).

The Court provides a lengthy analysis of the canons of statutory interpretations for interpreting § 523 (a) (8) (A) (ii) and finally concludes that the statutory terms “obligation to repay funds received as an educational benefit” and “Educational loan” means separate things. The tenth circuit explained:

It is clear to us that when § 523 (a) (8) refers to an “educational benefit”, just as when normal speakers of English refer to things like a health benefit, unemployment benefit or a retirement benefit, it uses a definition of “benefit” which implies a “payment”, “gift” or “service” that generally does not need to be repaid.

The Court concluded that Congress did not intend § 523 (a) (8) (A) (ii) to cover loans. To conclude to the contrary “would violate the canon against surpluses, as there would then be no need for a separate provision, except for the discharge of specific categories of student loans”. (internal citations omitted).

Apply the barrel of Noscitur a sociis—Interpreting an ambiguous word taking into account the surrounding words — the tenth circuit determined that “language” an obligation to repay funds received as an educational benefit “means a conditional funding grant for education – similar to a stipend and a scholarship – as opposed to a loan of educational funds. And therefore, the Court concluded that § 523 (a) (8) (A) (ii) was “designed to exclude grants money tied to the service obligation – a completely separate category from loans ”.

Mcdaniel cited and relied heavily on another Fifth Circuit case, Crocker v. Navient Solutions, LLC (In re Crocker), 941 F.3d 206 (5th Cir. 2019). There, the Fifth Circuit rejected a private lender’s argument that all private student loans were rendered non-dischargeable by the 2005 changes to section 523 (a) (8). The Court ruled that paragraph 523 (a) (8) (A) (ii) “applies only to education payments which are not initially loans but whose terms will create an obligation to repay in the event of default. of the terms of payments ”.

Take away Mcdaniel and Crocker The decisions:

While these decisions focus on private student loans for expenses other than tuition, they reinforce the national trend towards easing restrictions on the repayment of student loans through bankruptcy proceedings. Bankruptcy judges are aware of the financial hardships imposed by crippling student debt, and there is a growing desire to relax historically rigid standards for paying off private student loans, provided those loans place undue hardship on debtors.

Lenders and private services should keep abreast of similar cases to monitor their respective circuit’s interpretation of § 523 (a) (8) (A) (ii). Lenders who offer private student loans for living expenses and other costs not directly related to tuition should closely monitor future cases related to the Mcdaniel and Crocker decisions and have a competent lawyer to assist when a borrower seeks bankruptcy protection.