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Student loans and bankruptcy: 2 Circuit gives consumers a big win

Bankruptcy provides a fresh financial start in a lot of situations, but not all. One specific limitation currently under scrutiny is that involving the crossroads of bankruptcy and educational loans. Within bankruptcy laws is a provision that states funds used for education generally do not qualify for relief through bankruptcy. This provision has come under challenge as private loan providers and private educational facilities are essentially gorging those who are looking to get the education they need to find a better job and provide for their families.

Unfortunately, there are those who charge astronomical rates for education that may not translate to a better paying job. So what happens to those students? The ones who get loans to pay these bills only to find they cannot get a job that makes enough to repay those loans. That is a question courts throughout the country are facing, and many are ruling in an unexpected way.

Courts rule in favor of consumers, a growing trend

In a recent case that goes back to 2009, the 2nd U.S. Circuit Court of Appeals issued a big win for consumers in these types of situations. In this case a student faced major debt after graduation from a private university. He filed a bankruptcy petition and was approved, but the petition was unclear on whether it included his two private education loans. The loan provider, Navient, hired a collection company to aggressively seek repayment. The student repaid the loans but opened a putative class action against the loan provider in 2017.

The putative class action was a lawsuit that involved a group of students who were in a similar position. All had loans discharged in bankruptcy and yet Navient continued to seek repayment. Navient attempted to get the case dismissed, stating repayment was required because the loans were part of a provision of bankruptcy law that excluded loans that were “received as an educational benefit, scholarship or stipend.” The loan provider argued the provisions included private as well as government loans and, as a result, their loan did not qualify for relief through bankruptcy.

Ultimately, the court disagreed. It stated the provision in question was not as broad as the provider argued but instead included a vary narrow category of debt. Due to certain facts about the loan in question, it did not fit this narrow definition. These facts include that the loan went directly to the student’s bank account and exceeded the cost of tuition. It further clarified that educational debt cannot be discharged if it meets one of the three categories:

  • Loans and benefit overpayments backed by the government or a nonprofit,
  • Obligations to repay funds were received as an educational benefit, scholarship, or stipulation; and
  • Qualified private educational loans

In this instance, qualified private educational loans are eligible educational institutions, and the loan must fund only qualified education expenses.

This is not the first case to rule in this way. Both the 5th and 10th U.S. Circuit Courts of Appeals have taken a similar stance on these types of cases.

Hope grows for those struggling to pay off private loans

This case is one of a growing number that shows bankruptcy is likely an option for a fresh financial start for those who are struggling to pay off educational loans. It is also important to note that a professional with experience in this niche area can discuss options for those who do not qualify for bankruptcy relief.