Interesting Opinion – In Re Homaidan: Not All Private Student Loans Are Presumably Non-Repayable In Insolvency / Insolvency / Restructuring

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With over $ 1.7 trillion in outstanding student loans in the United States, student loan borrowers sometimes seek help from bankruptcy courts, often unsuccessfully due to the fact that most student loans are considered non-taxable.oneIn its decision dated July 15, 2021 No. In re Homaidan,2 The Court of Appeals for the Second Circuit considered one aspect of this issue – whether automatically designated private student loans made directly to the borrower are considered non-payable as “educational benefits” under section 523 (a) (8) of the Bankruptcy Code. The Second District concluded that this was not the case and ruled against the student loan applicant.

On the facts in question in Homaidanwhen the debtor went to college between 2003 and 2007, he received two “direct-to-consumer tuition fees”. The debtor argued that these loans were made independently of the debtor’s college financial aid department, were transferred directly into his bank account, and were in excess of his tuition fees. After graduation, the debtor filed a Chapter 7 bankruptcy claim and was fired without even contesting whether these student loans were repayable or actually repayable. Following the closure of the bankruptcy case, the debtor’s student loan creditor continued to seek collection of the loans, and the debtor, believing that the loans were still valid and enforceable, repaid them in full.

In 2017, the debtor filed a bankruptcy reopening petition to obtain an opinion that the loans had indeed been repaid. He then filed a case against the lender, claiming, among other things, that the lender had violated his rights by collecting the student loans he had paid off. The lender refused to pay on the grounds that the loans issued were eligible for the education grant exception. The bankruptcy court disagreed and rejected the creditor’s petition for rejection. In agreement with the bankruptcy court, the Second Circuit has determined that the loans in question are potentially repayable –those.there was no general rule that all private student loans were non-repayable, based on his view that the exclusion of “educational benefits” in Section 523 (a) (8) was rather limited in scope.

In particular, the Second Circuit noted that Section 523 (a) (8) includes three classes of education debt that are non-repayable: (1) loans issued or insured by the government; (2) commitments to return funds received as “educational aid, scholarship or scholarship”; and (3) “any other education loan” that meets the Tax Code definition as “qualified education loan”.3 The lender’s appeal only asserted that the student loans issued fall under the category of “education grant, scholarship or scholarship”,four and it was not claimed that the loan was a “scholarship” or “scholarship.” Thus, the only question was whether the loan was really “an obligation to repay the funds received as an education grant”.

The Second Circuit ruled that this was not the case, relying on various interpretative tools. The Court first noted that the direct meaning of the Section 523 (a) (8) (A) (ii) reference to “an obligation to pay back funds received as an educational grant” cannot simply be synonymous with a student loan, since Congress would not to call student loans “such unnatural words.” The Court also reviewed the context of Section 523 (a) (8) (A) (ii), emphasizing that both the previous and subsequent categories of education debt use the word “loans”, so the deletion of this word from “educational” “benefit” assumes that it did not include loans. Also applying the canon against surplus (those., interpreting the statute so that none of its words was superfluous), the court observed that the interpretation of the “educational aid”, including loans, would completely absorb the first and third categories (since the second category would already include the same loans) mentioned in the first and third category) improperly renders these individual provisions meaningless. Finally, the court applied
noscitur a sociis canon (those.that the meaning of the ambiguous term can be understood from the context of the words around it), noting that “fellowships” and “fellowships” under Section 523 (a) (8) (A) (ii) refer to payments of grants, which, unlike the loan usually does not need to be repaid and therefore “education grant” should be interpreted in the same way.

The court therefore concluded that the “education grant” exempted from dismissal under section 523 (a) (8) (A) (ii) is best read as referring to conditional grant payments similar to scholarships and scholarships for example, when an organization pays for individual tuition in exchange for an individual promise of some future job rather than a student loan. When an individual, having received a tuition fee, breaks his promise of return, he or she undertakes a “obligation to pay” the funds paid for his tuition and therefore has an obligation that is not supposed to be subject to withdrawal under section 523 ( a) (8). (A) (ii).

Until Homaidan is likely to be a somewhat important decision in the further development of student loan bankruptcy jurisprudence, it should be noted that the decision was relatively limited in scope, referring only to the category of debt related to education, “education grant, scholarship or scholarship” in the Code of bankruptcy Section 523 (a) (8) (A) (ii). Many, if not most, private student loans will still qualify as “any other educational loans” that are not deemed to be repayable under Section 523 (a) (8) (B) of the Bankruptcy Code, provided that they otherwise meet the criteria for qualified student loans under the Internal Revenue Code. In these cases, either
Brunner or a combination of circumstances will still determine whether the debtor is eligible for student loan repayment.

Footnotes

one In most of these cases, either Brunneror “cumulative circumstances” tests to determine whether the presumption of ineligibility on the basis of undue hardship for the debtor can be rebutted. See, for example,, Thomas’s case, 931 F.3d 449, 452 (5th Cir. 2019) (using 3-pin Brunner test, not a test for a “vague set of circumstances”).

2
Homaidan vs. Sally Mae, Inc. (In re Homaidan), No. 20-1981, 2021WL 2964271 (2nd arrondissement, July 15, 2021) (typo).

3 11 USC § 523 (a) (8).

four
See 11 USC § 523 (a) (8) (A) (ii).

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