Private student loans can be canceled in case of bankruptcy, 2nd circuit rules

What would you like to know

  • The ruling dealt with the preliminary question of whether private loans are actually protected in the bankruptcy process.
  • The ruling did not apply to loans guaranteed by the government.
  • This decision is a major victory for borrowers facing financial difficulties to repay their loans.

The United States Court of Appeals for the Second Circuit ruled for the first time on Thursday that student loans issued by the private sector could be canceled in the event of bankruptcy, a major victory for borrowers facing financial difficulties to repay their loans.

A unanimous Manhattan Court of Appeals panel ruled that the loans were not the type of “educational benefit” that could be exempt from discharge under federal law.

the decision upheld a Brooklyn bankruptcy judge’s ruling in favor of borrower Hilal Homaidan, who argued that lender Navient Solutions had long embarked on a “scheme” of granting dischargeable loans to uninformed student borrowers then demand repayment even after the release of bankruptcy loans.

Homaidan, a graduate of Emerson College, had sought to bankrupt more than $ 12,500 he had taken out in private loans to pay for his education. He is one of hundreds of thousands of potential plaintiffs in a proposed group targeting Navient in Brooklyn bankruptcy proceedings.

Navient and his McGuireWoods attorneys argued that his loans fell under a provision of federal law that protected “the obligation[s] to repay funds received as an educational benefit, scholarship or allowance ”from bankruptcy discharge.

US circuit judge Dennis Jacobs, however, dismissed this reading of the law on Thursday as being too broad, saying Navient’s proposed outcome “would encompass virtually all private student loans.”

“The defining characteristic of a loan, on the other hand, is an unconditional obligation to repay it,” Jacobs wrote for the panel.

“’Educational allowances’ should therefore be interpreted as referring to conditional grant payments similar to scholarships and stipends,” the judge said.

The ruling, which did not apply to government-guaranteed loans, brought the Second Circuit into line with two other circuit courts that had addressed the issue.

Homaidan is represented by counsel for Boies Schiller Flexner in New York; Jones, Swanson, Huddell & Daschbach and Fishman Haygood in New Orleans; and the Smith Law Group.

Adam Shaw, a partner of Boies Schiller, said in an interview that borrowers like Navient have “illegally collected” dischargeable loans for years, using a “stilted attempt to squeeze” the loans into law. The effect of Thursday’s decision, he said, would be felt across the lending industry.

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