Second Circuit Weighs In on Private Student Loans

Second Circuit Weighs In on Private Student Loans

The Situation: In Homaidan v. Sallie Mae, Inc., et al., the U.S. Court of Appeals for the Second Circuit not too long ago affirmed that sure forms of personal student loans should not “obligation[s] to repay funds received as an educational benefit, scholarship, or stipend” which might be exempt from discharge in chapter absent an undue hardship. 

The Result: This choice brings the Second Circuit in step with the Fifth and Tenth Circuits on this challenge. However, neither the Bankruptcy Court’s choice under nor the Second Circuit’s choice on enchantment decided the circumstances below which loans could also be discharged in chapter pursuant to 11 U.S.C. § 523(a)(8)(A)(i) or 523(a)(8)(B). 

Looking Ahead: Private student loans should be dischargeable below Section 523(a)(8)(A)(i) or 523(a)(8)(B) as “qualified education loans,” which the court docket in Homaidan didn’t think about. Nonetheless, following the COVID-19 pandemic, bankruptcies involving excellent and past-due student loan money owed will possible improve, and this precedent brings the Second Circuit in step with the Fifth and Tenth Circuits and will result in extra disputes relating to whether or not these money owed could be discharged. And on August 2, 2021, the bipartisan FRESH START Through Bankruptcy Act of 2021 was introduced for introduction within the Senate. This proposed laws goals to assist struggling debtors by amending the Bankruptcy Code provisions that govern discharge of student loans. Market individuals ought to proceed to observe these developments.

On July 15, 2021, a three-judge panel of the U.S. Court of Appeals for the Second Circuit held in Homaidan v. Sallie Mae, Inc., et al. that the personal student loans at challenge weren’t topic to the discharge exemption in Section 523(a)(8)(A)(ii) of the Bankruptcy Code for “obligation[s] to repay funds received as an educational benefit.” In the case under earlier than the Bankruptcy Court, the defendant lender and servicer (hereinafter, “lender”) moved to dismiss an adversary continuing introduced by a Chapter 7 chapter debtor alleging that the lender violated a chapter discharge order by accepting compensation of personal student loans that had been actually discharged as a result of they coated greater than certified schooling bills. The defendant argued that the loans had been exempt from discharge. The Bankruptcy Court thought-about the exemption to discharge for “obligation[s] to repay funds received as an educational benefit” below Section 523(a)(8)(A)(ii) of the Bankruptcy Code and located that it “does not sweep in all education-related debt,” together with the student loans at challenge. It due to this fact denied the defendant’s movement to dismiss. The Second Circuit granted interlocutory enchantment and affirmed. 

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The Second Circuit’s Decision

Like the Bankruptcy Court, the Second Circuit largely relied upon the plain language of the related statutory textual content, which exempts from discharge, amongst others, “obligation[s] to repay funds received as an educational benefit, scholarship, or stipend.” Decision at 9; see additionally 11 U.S.C. § 523(a)(8)(A)(ii). The defendant lender’s sole rivalry in its movement to dismiss was that the personal student loan to the plaintiff was an “educational benefit” below Section 523(a)(8)(A)(ii). However, the defendant reserved its rights to handle the plaintiff’s claims that the loans weren’t “qualified education loan[s]” below Section 523(a)(8)(B) at a later time within the litigation. 

The Second Circuit concluded that Section 523(a)(8)(A)(ii) can’t be interpreted to incorporate “loans” the place that particular phrase was utilized in associated provisions and particularly absent from the governing subpart. The court docket additionally famous that it couldn’t undertake the defendant’s broad interpretation of the availability—”under which any loan is nondischargeable under Section 523(a)(8)(A)(ii) if it was used to further one’s education—[as it] would draw virtually all student loans within” the exemption. This, based on the court docket, would improperly render the exemptions in Section 523(a)(8)(A)(i) and 523(a)(8)(B) meaningless. Thus, the phrase “educational benefit” was restricted by the court docket to align with the phrases “scholarship” and “stipend” additionally laid out in Section 523(a)(8)(A)(ii). Because the enchantment arose from a call on a movement to dismiss, the court docket didn’t attain a conclusion on whether or not the plaintiff’s loan was certainly discharged in his chapter. It remanded the case to the Bankruptcy Court for additional proceedings. 

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Impact on Future Litigations

The Second Circuit’s choice doesn’t utterly make clear the principles surrounding discharge of student loans. Indeed, the court docket didn’t think about whether or not the personal student loans at challenge are “qualified education loan[s]” and thus not topic to discharge below Section 523(a)(8)(B). Moreover, the choice doesn’t implicate public student loans in any respect, that are exempt from discharge absent findings that paying the debt would trigger the debtor “undue hardship.” In Thelma G. McCoy v. United States, a plaintiff not too long ago petitioned for a writ of certiorari to the U.S. Supreme Court to resolve a circuit break up relating to the suitable check for evaluating an “undue hardship.” However, in June 2021, the Court denied the petition, leaving the circuit break up intact and opening the door to continued inconsistent rulings.

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