Student borrowers with certain types of private loans have moved closer to being able to pay off that debt in bankruptcy after a New York court ruling.
Thursday, the United States Court of Appeals for the Second Circuit face with student debtor Hilal Homaidan against student loan giant Navient (NAVI), who had argued that private student loans could not be written off under existing bankruptcy laws.
A panel of three judges determined that some private student loans can be canceled in certain cases by bankruptcy, just like credit cards and other debts, if certain conditions are met.
“The broad interpretation of Navient – under which any loan is non-releasable under §523 (a) (8) (A) (ii) if used for further education, it would attract virtually all student loans under § 523 (a) (8) (A) (ii), ”said circuit judge Dennis Jacobs. “This construction proves too much. “
The ruling, along with similar decisions in Circuits 5 and Tenth, suggests that private lending services such as Navient will find it difficult to claim that not all private student loans are dischargeable in bankruptcy.
“It kind of creates that domino effect… where you have three appellate court cases saying this type of student loan can be canceled,” Jason Iuliano, associate professor of law at the University of Utah and expert on student loan bankruptcy law, Yahoo Finance said. “You’re going to get the lawyers to think more about this… and really rethink their categorical advice that they’re giving everyone that student loans can’t be canceled. “
A spokesperson for Navient, who was estranged from Sallie Mae in 2014, told Yahoo Finance that the latest ruling only applied to one issue of the appeal and that the company “has argued multiple defenses and looks forward to presenting these defenses as the case progresses. “
At the same time, citing an ongoing push to reform the bankruptcy code, the company added, “We recognize that some student borrowers face long-term financial challenges, and that is why, for several years, Navient recommended bankruptcy reform that would allow federal and private student loans to be discharged in bankruptcy after making a good faith effort to repay them. “
Navient can no longer claim that private student loans are not dischargeable
Student loans have traditionally been considered non-dischargeable in personal bankruptcy or only eligible in very limited circumstances, with different guidelines for private and federally guaranteed debt.
There are roughly $ 100 billion in outstanding private student debt and over $ 1.56 trillion in outstanding federally backed student debt.
According to lawyers for Homaidan, up to or more than $ 50 billion in private student loans could be dischargeable in bankruptcy, because these loans were made to finance studies at unaccredited schools or did not serve as a “benefit.” educational ”as defined by law.
For Navient, “one of the defenses… was that these [private student loans] are non-dischargeable in bankruptcy and constitute a type of loan or benefit protected in law ”, Adam Shaw, partner at Boies Schiller Flexner LLP, who represented Homaidan, told Yahoo Finance.
But, Shaw added, the latest ruling suggests Navient “can no longer claim that private student loans are not dischargeable in bankruptcy as an educational benefit.”
Along with other recent cases, the latest ruling adds to a growing trend that student debtors could claim that loans taken out to participate in an unauthorized program or used to fund student costs beyond educational benefits were dischargeable. in the context of bankruptcy proceedings.
Tuition Response Loans
Homaidan attended Emerson College from 2003 to 2007, taking out direct consumer loans called “Tuition Response Loans” from Sallie Mae, Navient’s predecessor. The loans amounted to approximately $ 12,500.
Tuition Response Loans, which were first offered by Sallie Mae in 2004, according to the SEC 10-K filing in 2008, did not come through the school’s financial aid office. Instead, TV commercials sold the loans directly to consumers and the funds went straight to bank accounts, court documents show.
After graduating, Homaidan filed for Chapter 7 bankruptcy with the U.S. Bankruptcy Court for the Eastern District of New York. In that petition, he listed Navient’s loans as liabilities and ultimately obtained a discharge order from the bankruptcy court – but the order did not specify which debts were discharged.
Navient then hired a collection company to collect the loans. Homaidan, confused, assumed the loans had not been paid and he paid Navient in full.
In 2017, he decided to reopen his bankruptcy case to determine whether these tuition response loans had indeed been discharged during the original proceedings. Navient repelled, arguing that these loans were exempt from discharge under 11 USC § 523 (a) (8) (A) (ii). The Second District rejected Navient’s argument, ruling that Homaidan’s tuition response loan was “outside the scope” of this law.
At the end of 2007, Sallie Mae tenuous $ 3.3 billion in tuition response loans. The company stopped issuing new tuition response loans in 2008.
Shaw estimated that of that $ 3.3 billion, there could be around 300,000 loans involving $ 500 million in outstanding debt that looked like Homaidan’s: potentially dischargeable but still targeted by collections.
“Hundreds of thousands, if not millions, of people who had been turned down for bankruptcy or who thought they were not eligible [with student loans]… It’s safe for them to reconsider their luck, ”Austin Smith of Smith Law Group, another Homaidan lawyer, told Yahoo Finance.