September 2, 2020

Court Allows Bankruptcy Discharge Of $200,000 In Student Loans

Court Allows Bankruptcy Discharge Of $200,000 In Student Loans


A new ruling by a U.S. appeals court has affirmed the cancellation of a borrower’s $200,000 in private student loans.

In McDaniel v. Navient, the U.S. Court of Appeals for the 10th Circuit affirmed a lower bankruptcy court’s determination that a borrower’s private student loan debt could be discharged in bankruptcy.

The bankruptcy code treats student loan debt differently from most other forms of consumer debt, such as credit cards and medical bills. Borrowers must generally prove that they have an “undue hardship” in order to discharge their student loan debt in bankruptcy. These restrictions initially only applied to federal student loans, but were subsequently expanded to cover private student loans following the passage of a 2005 bankruptcy reform bill.

The “undue hardship” standard applied to student loan debt is not adequately defined in statute, so bankruptcy judges have established various tests (which vary by jurisdiction) to determine discharge eligibility. In order to show that they meet this standard, borrowers must initiate an “adversary proceeding,” which is essentially a lawsuit within the bankruptcy case that is brought against the borrower’s student loan lenders. Through the adversary proceeding, the borrower must present evidence showing that they meet the undue hardship standard, while the student lenders present opposing evidence. The adversary proceeding can be a long and invasive process for borrowers, and can get quite expensive for those who retain a private attorney. Student loan lenders may also have significantly more resources than borrowers, which can give them an edge in the litigation. As a result, many student loan borrowers are unsuccessful in proving undue hardship, and many others don’t even try.

The recent ruling from the 10th Circuit could change this.

The borrower in the case had taken out $120,000 in private student loans. When she became unable to afford the monthly payments, she said that Navient would not work with her to provide an affordable repayment schedule (private student loans are not eligible for federal income-driven repayment plans). She eventually went into bankruptcy. After her bankruptcy ended, Navient added on tens of thousands of dollars in additional interest, leaving her in an even worse position and causing her to pay even more money to Navient. She ultimately then petitioned the bankruptcy court to reopen the bankruptcy case to rule that the private student loans were, or should have been, discharged.

Rather than basing the decision on the undue hardship standard, the bankruptcy court found that the private student loans at issue did not even fall within the “undue hardship” provision of the bankruptcy code in the first place. The bankruptcy court held that the borrower’s private student loans were not “an obligation to repay funds received as an educational benefit” within the meaning of the bankruptcy code because they “were not made solely for the ‘cost of attendance’” at the borrower’s school.

Navient appealed, and the 10th Circuit Court of Appeals affirmed the lower bankruptcy court’s decision. Furthermore, the court rejected Navient’s argument that these private student loans were covered by the discharge exemptions provided by the 2005 reforms to the bankruptcy code.

The ultimate impact of this decision remains to be seen. While the case could set important precedent and be cited in future bankruptcy cases, that precedent would (for the time being, at least) be limited only to the 10th Circuit’s jurisdiction, which includes Colorado, New Mexico, Oklahoma, Utah, and Wyoming. Bankruptcy scholars have also suggested that the ruling may only affect the dischargeability of private student loans that either exceed the cost of attendance at an accredited school or private student loans from non-accredited schools, rather than all private student loans.

Nevertheless, the decision is an important ruling, and serves as a reminder that pursuing a bankruptcy discharge of student loan debt is not a lost cause, despite the many hurdles.

The full written decision can be found here.



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