Blog

Can You Wipe Out Student Loan Debt in Bankruptcy?

July 26, 2021 | by Kevin R. Lelonek
Share

The recent ruling from the Second Circuit is being seen as a win for consumers holding student loan debt, but the decision is very narrow in scope.

It has been a long-held belief that virtually all student loans are one of the few debts that cannot be discharged as part of a bankruptcy proceeding. In keeping with the recent trend from other federal courts, in a ruling handed down on July 15 by the United States Court of Appeals for the Second Circuit, the court held that another small set of student loans may be dischargeable in bankruptcy.

The three-judge panel ruled in favor of student loan debtor Hilal Homaidan in his legal battle against student loan provider Navient.

Homaidan filed for bankruptcy in 2007 and listed roughly $12,500 in private student loan debt owed to Navient. Unlike a more traditional student loan, the Navient loans did not go through Emerson College’s financial aid office (Homaidan’s school at the time). Instead the money was deposited directly into his personal bank account and the money exceeded what was needed for his tuition.

Despite the Bankruptcy Court seemingly discharging the debt, Navient employed a collection agency to go after Homaidan for the money. After paying back the loan (believing it had not been discharged) Homaidan filed suit against Navient to recoup the money.

The court was faced with interpreting one of three provisions of the bankruptcy code that exclude student loans from discharge.  The lender only argued that Homaidan’s loans were ineligible for discharge under one of those three provisions.  That provision excludes from discharge an “obligation to repay funds received as an educational benefit, scholarship, or stipend.”

Attorneys arguing on behalf of the lender made the case that Homaidan received “educational benefit” as a result of the loan because it was used to pay for his college, making it non-dischargeable under the provision at issue.

In its written decision, the court disagreed.  If the court accepted Homaidan’s definition of an “educational benefit”, then “virtually all student loans” would fall within that one provision, and the other two provisions would be meaningless because they would not apply to any student loan that was not already covered as an “educational benefit”.  

Though Navient plans to continue the legal fight, the ruling from the Second Circuit opens the door for additional challenges by students whose loans were paid directly to them, instead of to their schools.

An attorney representing Homaidan went a step further. In an interview with Reuters News Agency following the decision, George Carpinello of Boies Schiller Flexner, said the decision is significant for people who might have wanted to seek bankruptcy relief to address their student loan debt but assumed their private loans would not be dischargeable.

“What’s really egregious about this is Navient has been telling people for years that their loans are non-dischargeable, when in fact they are dischargeable,” he said.

While our bankruptcy practice focuses on commercial filings, we represent a diverse client population in a wide range of legal matters. For many of those individuals, as well as the broader community, this decision could open the door for significant relief from certain student loan debts that may have been previously regarded as not dischargeable.

If you have questions or wonder what options you may have, give us a call. We have developed strong relationships with outstanding attorneys who handle these cases and are happy to connect you with the proper attorney to handle your needs.

Kevin R. Lelonek provides counsel to clients in the areas of business bankruptcy and reorganization as well as commercial and business litigation. He can be reached at 716-854-4300 ext. 207 or klelonek@gross-shuman.com 

Related Attorneys

Let us help you.