Second Circuit Says Some Private Student Loans Are Dischargeable In Bankruptcy | Kramer Levin Naftalis & Frankel LLP


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Overview

In Hilal K. Homaidan v. Sallie Mae, Inc., Navient Solutions, LLC, Navient Credit Finance Corporation, Case No. 20-1981 (2d Cir. 2021), the Second Circuit upheld the opinion of the US Bankruptcy Court for the Eastern District of New York, which held that private student loans are not exempt from the discharge under Article 523 (a) (8) (A) (ii) of the Bankruptcy Code, which excludes from the discharge “an obligation to repay funds received as an educational benefit, scholarship or allowance” . 11 USC § 523 (a) (8) (A) (ii).

Background

Hilal K. Homaidan has received private educational loans totaling $ 12,567 from Sallie Mae Inc. (and successor Navient Solutions LLC and Navient Credit Finance Corporation) (collectively, “Navigate“), which he used to finance his education at Emerson College. Shortly after graduating, Mr. Homaidan filed for Chapter 7 bankruptcy with the US District Bankruptcy Court is from New York. The bankruptcy court’s discharge order was ambiguous as to whether the Navient loans were discharged.

After the bankruptcy proceedings were closed, Navient demanded repayment of the loans, which led Mr. Homaidan to assume that the loans had not been discharged and led to Mr. Homaidan to pay off Navient’s loans in full. Subsequently, Mr. Homaidan reopened the bankruptcy case and initiated adversarial proceedings against Navient to seek, among other things, actual damages for Navient’s alleged violation of the discharge order.

The United States Bankruptcy Court for the Eastern District of New York determined that Navient’s loans were not exempt from discharge under section 523 (a) (8) (A) (ii), see Homaidan v. SLM Corp. (In re Homaidan), 596 BR 86, 107 (Bankr. EDNY 2019), and Navient appealed.

Opinion of the second circuit

As summarized in Circuit 2, the Bankruptcy Code sets out three categories of educational debts that cannot be discharged in bankruptcy in the absence of proof of undue hardship: (i) loans and guaranteed benefit overpayments by government or a non-profit organization; (ii) the obligation to repay funds received as an educational benefit, scholarship or allowance; and (iii) qualified private educational loans. See 11 USC § 523 (a) (8). Navient argued that his loans fall into the second category because his loan agreement constitutes an “obligation to repay funds” that Mr. Homaidan obtained in order to advance his studies, thereby obtaining an “educational benefit”. .

The Second Circuit ruled that Navient’s interpretation violated several rules of statutory interpretation. Navient argued that the ordinary public meaning of “an obligation to repay funds received as an educational benefit” includes student loans. However, as the bankruptcy court explained, it would be “an unconventional way of discussing a loan.” In re Homaidan, 596 BR to 102. The Second Circuit noted that if Congress had intended to exclude all educational loans from the landfill, it would not have done so on such staid terms. Further, the court rejected Navient’s attempt to read “loan” in section 523 (a) (8) (A) (ii), noting that “loan” does not appear in section (ii), as this is the case in section (i) and Section (iii). Finally, the Second Circuit rejected Navient’s broad interpretation of section 523 (a) (8) (A) (ii), which would draw virtually all student loans into scope, making the other sections of the superfluous laws. The court determined that the term “education benefit” is best interpreted to mean conditional grant payments similar to scholarships and stipends, that is, terms that describe payments that are generally not due. be repaid, unlike a loan.

Thus, based on various canons of statutory interpretation, the Second Circuit upheld the decision of the Eastern District Bankruptcy Court of New York and held that Mr. Homaidan’s private student loans were dischargeable under Section 523. (a) (8) (A) (ii) of the Bankruptcy Code.

Why this case is interesting

The opinion of the Second Circuit is important because it may now be easier for student loan borrowers to free themselves from private student loans in the event of bankruptcy. The ruling may partly counteract the widespread but overly simplistic perception that private student loans are not dischargeable in the absence of “undue hardship.” This decision is consistent with previous decisions of the Fifth and Tenth Circuits, which also 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. See McDaniel v. Navient Sols., LLC (In re McDaniel), 973 F.3d 1083 (10th Cir. 2020); Thomas v. Dept. of Educ. (In re Thomas), 931 F.3d 449, 450 (5th Cir. 2019).

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