Court authorizes release of $ 200,000 in student loans in bankruptcy

A new ruling from a US appeals court upheld the cancellation of a borrower’s $ 200,000 in private student loans.

In McDaniel vs. Navient, the U.S. 10th Circuit Court of Appeals upheld a lower bankruptcy court ruling that a borrower’s private student loan debt could be discharged in bankruptcy.

The bankruptcy code treats student loan debt differently from most other forms of consumer debt, such as credit cards and medical bills. Borrowers usually have to prove they have “undue hardship” in order to pay off their student loan debt in bankruptcy. These restrictions initially applied only to federal student loans, but were later extended to cover private student loans following the passage of a bankruptcy reform bill in 2005.

The “undue hardship” standard applied to student loan debt is not adequately defined in law, so bankruptcy judges have established various tests (which vary by jurisdiction) to determine eligibility for credit. the Liberation. In order to show that they meet this standard, borrowers must initiate “adversarial proceedings,” which is essentially legal action in bankruptcy proceedings against the borrower’s student lenders. In adversarial proceedings, the borrower must present evidence demonstrating that they meet the undue hardship standard, while student lenders present evidence to the contrary. Adversarial proceedings can be a long and invasive process for borrowers, and can be quite expensive for those who use private attorneys. Student lenders may also have significantly more resources than borrowers, which may give them an edge in the litigation. As a result, many student loan borrowers fail to prove undue hardship, and many others don’t even try.

The recent 10th Circuit decision could change that.

The borrower in the case had taken out $ 120,000 in private student loans. When she became unable to pay the monthly payments, she said Navient would not work with her to provide an affordable repayment schedule (private student loans are not eligible for federal income-based repayment plans). She eventually went bankrupt. After her bankruptcy ended, Navient added tens of thousands of dollars in additional interest, leaving her in an even worse situation and causing her to pay Navient even more money. She ultimately asked the bankruptcy court to reopen the bankruptcy case to rule that the private student loans were, or should have been, canceled.

Rather than basing the decision on the undue hardship standard, the bankruptcy court found that the private student loans at issue did not even fall under the “undue hardship” provision of the bankruptcy code. The bankruptcy court ruled that the borrower’s private student loans were not “an obligation to repay funds received as an educational benefit” within the meaning of the bankruptcy code because they “were not made solely for “tuition fees” ”at the borrower’s school. .

Navient appealed and the 10th Circuit Court of Appeals upheld the lower bankruptcy court’s decision. Further, the court rejected Navient’s argument that these private student loans were covered by discharge exemptions provided for in the 2005 bankruptcy code reforms.

The final impact of this decision remains to be seen. While the case could set an important precedent and be cited in future bankruptcy cases, that precedent would (for now, at least) be limited only to 10th Circuit jurisdiction, which includes Colorado, New Mexico, Oklahoma, Utah and Wyoming. Bankruptcy specialists have also suggested that the ruling cannot affect the releasability of private student loans that exceed the cost of attending an accredited school or private student loans from unaccredited schools, rather than all private student loans.

Nevertheless, the decision is an important one and reminds that the pursuit of a release from student debt is not a lost cause, despite the many obstacles.

The full written decision can be found here.

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