Tenth Circuit Agrees with Fifth Circuit – Private Student Loans May Be Dischargeable in Bankruptcy | Bradley Arant Boult Cummings LLP


The 10e Circuit has joined several circuit courts, holding that private student loans are dischargeable in bankruptcy. In McDaniel vs. Navient Solutions, a case of first impression in the 10e Circuit, the court concluded 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 Coded. In the fall of 2019, the fifth circuit of Crocker vs. Navient Solutions likewise held that private educational loans are not legally exempt from the discharge, in the absence of undue hardship. In other words, they can be discharged like other debts. We have already blogged on the Crocker case, which has been widely cited in the Mcdaniel opinion.

The Mcdaniel The case involved a Chapter 13 filing where the debtors had eleven student loan accounts, owing approximately $ 200,000. The confirmed Chapter 13 debtors plan provided that “[s]student loans should be treated as an unsecured category four debt or as follows: deferred until the end of the plan. A standard discharge order was issued and the case was closed. After release, the McDaniel’s made approximately $ 37,000 in loan payments. The debtors subsequently reopened the bankruptcy case and filed a lawsuit against Navient seeking (i) a declaratory judgment that their student loans had been canceled in bankruptcy and (ii) damages resulting from breaches of the bankruptcy. release. On appeal, the court considered (1) whether it was res judicata that the student loans were excluded from discharge on the basis of the confirmed plan of Chapter 13 and (2) whether the student loans are not dischargeable under the § 523 (a) (8) (A) (ii).

The 10e Circuit summarily dismissed the claim that the plan established that student loans were exempt from discharge because the plan did not contain any explicit statement or determination as to the discharge of student loans. The 10e Circuit then addressed the question of whether private educational loans are subject to a discharge. Article 523 (a) (8) (A) (ii) of the Bankruptcy Code provides:

(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 through an educational benefit, scholarship or allowance; Where

(B) any other student loan that is a qualified student loan, as defined in Section 221 (d) (1) of the Internal Revenue Code of 1986, contracted by a debtor who is an individual. (emphasis added)

As the fifth circuit in Crocker, The 10e Circuit stressed that discharge exceptions should be interpreted narrowly in favor of the debtor. The tribunal then went through the various statutory canons to interpret the law. The 10e Circuit focused on the use of the terms “student loan” in relation to “the obligation to repay funds received for an education benefit” and concluded that these clearly mean separate things. . The term “educational benefit” is more closely related to the other terms in section (A) (ii) (scholarship and allowance) which “means a grant, not a loan”. In the court’s view, normal speakers of English use the term “benefits” in the context of things such as health benefits, unemployment benefits, or retirement benefits to imply a payment, gift or benefit. service, not something that needs to be refunded. If section (A) (ii) included the repayment of private student loans as an “educational benefit”, section (A) (i) would be redundant and contrary to the canon against surplus. The court found that “an obligation to repay funds received as an educational benefit” means a conditional funding grant for education – similar to a stipend and scholarship – as opposed to a loan of funds for education. education. In other words, “[s]Subsection (A) (ii) was designed to exclude from the discharge cash grants that are tied to service obligations – a completely separate category from loans.

Following the 2005 changes to Section 523, commentators painted with a broad brush alleging that private student loans were now dischargeable. However, the Mcdaniel This case reflects the growing trend allowing a debtor to pay off certain private student loans. Private student lenders and service providers should take special note of this case as the last chapter and prepare for similar challenges.