Rules of the Second Circuit Private Student Loans May Be Canceled in Bankruptcy | Trout pepper
On July 15, the United States Court of Appeals for the Second Circuit ruled that private student loans are not explicitly exempt from a debtor’s Chapter 7 bankruptcy discharge.
In Homadian, the borrower, after graduating from Emerson College, filed for Chapter 7 bankruptcy in 2007 and was granted discharge in 2009. The discharge order did not specify whether it applied to both student loans loans of the borrower, totaling $ 12,567. The loan manager requested repayment of the loans, which the borrower eventually repaid in 2017.
Shortly after, the borrower reopened his bankruptcy case to bring an alleged class action lawsuit against the loan manager for violating the discharge order. The agent decided to lay off, arguing that Section 523 (a) (8) (A) (ii) of the Bankruptcy Code prevented the loans from being released. In doing so, the duty officer argued that the term “educational benefit” encompasses all private student loans. The district court disagreed, finding that the text and structure of Articles 523 (a) (8) and 523 (a) (8) (A) (ii) exempted the acquittal of a much narrower category of debt. The duty officer filed an interlocutory appeal, and the second circuit confirmed.
The only question to be considered was “whether the loans in question constitute ‘an obligation to repay funds received as an educational benefit” and were therefore exempt from discharge under § 523 (a) (8) (A ) (ii). “
The second circuit found that under section 523 (a) (8), three categories of loans cannot be released:
- loans and overpayments of benefits guaranteed by the government or a non-profit organization;
- obligations to repay funds received as an educational benefit, scholarship or allowance; and
- qualified private educational loans.
The duty officer did not argue that the loans fell into the first or third category. Instead, the agent argued that the loan agreements created an “obligation to repay the funds” and that the funds were obtained for the purpose of advancing the borrower’s education, thereby deriving a “benefit. educative “.
The Second Circuit embarked on an analysis of the statutory interpretation of the United States Bankruptcy Code in order to determine the underlying meaning of “educational provision” in the text. In doing so, the court concluded that the ordinary meaning of the text does not support the interpretation of the duty officer. Instead, finding that if Congress had intended to exclude all student loans from discharge under Section 523 (a) (8) (A) (ii), “it would not have not done in such stilted terms ”. Additionally, the court ruled that the term “education benefit” is best read to refer to conditional grant payments such as scholarships and stipends and does not cover all private student loans. Essentially, the Second Circuit determined that, according to the administrator’s reading, “the term ‘educational benefit’ would encompass virtually all private student loans,” which the court categorically rejected.
The court ruling brings it into line with the Fifth and Tenth Circuits, which have also issued similar rulings on private student loans.