Opinion of Interest – In re Homaidan: Not all Private Student Loans are Presumptively Nondischarbeable in Bankruptcy

With over $ 1.7 trillion in overdue student debt in the United States, student borrowers sometimes try to turn to bankruptcy courts for relief, often unsuccessfully due to the fact that most student loans are presumed non-releasable.[1] In its decision of July 15, 2021 in A re Homaidan,[2] the Second Circuit Court of Appeal considered one aspect of this issue: whether certain private student loans made directly to a borrower are automatically presumed non-dischargeable as “educational benefits” under section 523 (a) (8) of the Bankruptcy Code. The Second Circuit found that they are not, ruling against the appealing student loan lender.

By virtue of the facts at issue in Homaidan, when the debtor was attending university between 2003 and 2007, he obtained two “direct-to-consumer tuition response loans”. The debtor alleged that these loans were made independently of the debtor’s college financial aid office, were deposited directly into his bank account, and exceeded the cost of his tuition. After graduating, the debtor filed for Chapter 7 bankruptcy and was granted discharge without ever making a plea as to whether these student loans were dischargeable or, in fact, discharged. After the bankruptcy case was closed, the debtor’s student lender continued to collect the loans and the debtor, believing that the loans were still valid and enforceable, repaid them in full.

In 2017, the debtor decided to reopen his bankruptcy case in order to obtain a ruling that the loans were in fact paid. He then initiated proceedings against the lender alleging, among other things, that the lender had violated his rights by collecting the released student loans. The lender sought rejection on the grounds that the loans in question fell under the “educational benefit” exception. The bankruptcy court disagreed and dismissed the lender’s motion to dismiss. In agreement with the bankruptcy court, the Second Circuit concluded that the loans in question were potentially dischargeable—that is to say, there was no general rule that not all private student loans were dischargeable — based on his view that the “education benefits” exception in Section 523 (a) ( 8) has a fairly limited scope.

Specifically, the Second Circuit noted that Section 523 (a) (8) includes three categories of educational debts that are not dischargeable: (1) loans issued or insured by the government; (2) the obligation to repay funds received as an “educational benefit, scholarship or allowance; And (3) “any other educational loan” that meets the Internal Revenue Code definition of a “qualifying educational loan”.[3] The lender’s appeal only claimed that the student loans in issue fell within the category of “education, bursary or allowance”,[4] and he did not argue that the loan was a “scholarship” or an “allowance”. Thus, the only question was whether the loan was in fact an “obligation to repay funds received as an educational benefit”.

Circuit 2 concluded that this was not the case, relying on various statutory interpretation tools. The court first noted that the ordinary meaning of Section 523 (a) (8) (A) (ii) reference to an “obligation to repay funds received as an educational benefit” could not just be synonymous with student loans, because Congress would not have referred to student loans “in such stilted terms.” The court also considered the context of section 523 (a) (8) (A) (ii) – insisting that the preceding and following categories of student debt use the word “loans”, so that the omission of that word from “profit” suggested that it did not include loans. Also apply the barrel against the surplus (that is to say, interpreting a statute so that none of its terms are superfluous), the court observed that interpreting the “education benefit” to include loans would swallow up the first and third categories in their entirety (since the second category would already include the same loans also covered by the first and third categories) making these separate provisions unduly meaningless. Finally, the court applied the noscitur a sociis cannon (that is to say, that the meaning of an ambiguous term can be taken from the context of the words surrounding it), noting that “scholarships” and “allowances” under section 523 (a) (8) ( A) (ii) refer to grant payments which, unlike a loan generally would not need to be repaid and, therefore, the term “educational benefit” should be interpreted in the same way.

Thus, the court concluded that the “education benefit” other than the discharge under section 523 (a) (8) (A) (ii) is best interpreted to refer to similar conditional grant payments. scholarships and stipends, for example when an organization pays an individual’s tuition fees in exchange for the individual’s promise of some sort of future performance, rather than a student loan. When the individual, after having received the benefit of the tuition fees, breaks his promise of return, he incurs an “obligation to reimburse” the funds paid for his tuition fees, and therefore has an obligation which is presumed non-releasable under of Section 523 (a) (8) (A) (ii).

While Homaidan is likely to be a somewhat important decision in the further development of student loan bankruptcy case law, it should be noted that the decision was relatively limited in scope, dealing only with the category of ‘educational benefits, scholarships or allowances ”of education-related debts in Section 523 (a) (8) (A) (ii) of the Bankruptcy Code. Many, if not most, private student loans will still be considered “any other student loans” that are deemed non-dischargeable under section 523 (a) (8) (B) of the Bankruptcy Code, provided that they also meet the criteria for qualified educational loans under the Internal Revenue Code. In these cases, either the Brunner or the test of all the circumstances will still determine whether the debtor can get a student loan discharge.

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