Private student loans can be thrown into bankruptcy, appeals court judges


Signage is visible at Navient’s offices in Wilmington, Delaware, USA on June 9, 2021. REUTERS / Andrew Kelly

  • Decision could open the door for more borrowers to pay off their student loan debts
  • Navient supports bankruptcy law reform

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(Reuters) – A New York-based federal appeals court said Thursday that private student loans are not protected from discharge in bankruptcy.

In one 21-page decision, a three-judge panel of the 2nd U.S. Court of Appeals upheld U.S. bankruptcy judge Elizabeth Stong’s refusal to dismiss a lawsuit against student loan manager Navient Solutions LLC, accusing her of violating an earlier court order discharging a borrower’s loans.

George Carpinello of Boies Schiller Flexner, who represented the borrower, said in an interview Thursday that the decision was important for people who might have wanted to seek bankruptcy relief to settle their student loan debt, but felt that they could not because they assumed their loans would not be dischargeable.

“What is really glaring about this is that Navient has been telling people for years that their loans are not dischargeable when in fact they are dischargeable,” he said.

After graduating from Emerson College, the borrower, Hilal Homaidan, filed for Chapter 7 bankruptcy in New York City and in 2009 was granted a discharge of his loans. But the release order was unclear as to whether it applied to Homaidan’s two private loans, which amounted to $ 12,567, according to the ruling. Navient, succeeding Sallie Mae as loan manager, demanded their repayment in all cases.

Homaidan repaid the loans, but in 2017 reopened his bankruptcy case to file a putative class action lawsuit against Navient accusing him of demanding repayment of the loans that were released from bankruptcy. Navient decided to dismiss the case, saying the loans could not be canceled under a provision in bankruptcy law that prevents a borrower from fulfilling “an obligation to repay funds received as educational benefit “.

Navient, represented by McGuireWoods, argued that these words encompass not only government loans but also private student loans, while Homaidan argued that they only apply to a select group of conditional grant payments. .

In the decision, drafted by Circuit Judge Dennis Jacobs and joined by Justices Denny Chin and William Nardini, the court concurred with the bankruptcy court’s conclusion that the wording of the “educational benefits” provision is “a unconventional way to discuss a loan ”. The court said that if Congress had intended to protect all educational loans from the landfill, “it would not have done so on such staid terms.”

The 5th and 10th U.S. Circuit Courts of Appeal have rendered similar decisions on private student loans.

Navient said in a statement that the appeal concerns only one aspect of the case and that he will continue to present defenses on other issues of the case.

“We recognize 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 a bankruptcy. bankruptcy after making a good faith effort to repay. “said Navient.

Earlier this year, Navient foiled an attempt by a handful of student loan borrowers to force him into involuntary bankruptcy.

The case is Hilal K. Homaidan v Sallie Mae, Inc. et al., US 2nd Circuit Court of Appeals, No. 20-1981.

For Homaidan: George Carpinello, Adam Shaw, Robert Tietjen and Jenna Smith of Boies Schiller Flexner, Austin Smith of Smith Law Group, Lynn Swanson and Peter Frieberg of Jones Swanson Huddell & Daschbach and Jason Burge of Fishman Haygood

For Navient: Thomas Farrell and Elizabeth Sieg of McGuireWoods

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Judge rejects student loan borrowers’ offer to force Navient into bankruptcy