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Home›Loans›What does the Homaidan case change about private student loans in bankruptcy? | McGlinchey Stafford

What does the Homaidan case change about private student loans in bankruptcy? | McGlinchey Stafford

By Anthony Lewis
July 22, 2021
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The non-availability of private student loans in bankruptcy proceedings has long been assumed to be almost absolute, but a decision of July 15, 2021 (Homaidan v. Sallie mae) by the United States Court of Appeals for the Second Circuit suggests that is not always the case.

Unlike many headlines surrounding this case, however, the Court of Appeal has generally not found private student loans to be dischargeable. Rather, the Court narrowly concluded that the creditor discharge exception invoked in his appeal was not, in law, applicable to the private student loan at issue in the case.

To review, the US Bankruptcy Code (the Code) makes certain student debts non-dischargeable (except discharge) in the absence of proof of undue hardship for the debtor and his dependents. In the relevant part, Article 523 of the Code lists the three non-dischargeable student debts as:

  • An education allowance overpayment or loan made, insured or guaranteed by a government unit, or made under any program funded in whole or in part by a government unit or non-profit institution.
  • An obligation to repay funds received as an educational benefit, scholarship or allowance.
  • Any other student loan that is a qualified student loan, as defined in Section 221 (d) (1) of the Internal Revenue Code of 1986, contracted by a debtor who is an individual.

The question in Homaidan was whether the borrower’s loan fell within the exception for “funds received as an educational benefit”. The creditor argued that the debt should be exempt from discharge under this exception, but the appellate court found this argument unconvincing, largely because the exception for funds received as a benefit Education did not specifically refer to loans (unlike the other two exemptions which use the word “loan”) and instead limited itself to conditional grant payments similar to scholarships and stipends. Based on this rationale, the court of appeal upheld the dismissal of the defendant creditor’s motion for dismissal.

It is important to note that the only question decided by the court was whether the exemption from release related to the obligation to repay funds received as an educational benefit applied to private student loans. The court said no, but the court did not analyze the scope of the “qualifying educational loan” exception on release. We therefore believe that this case should not be interpreted as a significant change with regard to the exemption of private education loans. Most private student loans will meet the definition of an “eligible student loan,” the typical exception cited by private student loan creditors. In most cases, the practical effect of this exception means that the borrower will not be able to pay off the loan unless he can prove to the court that repayment of the loan would be a hardship. excessive. the Homaidan case did not change this result.


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