Private student loans can be declared bankrupt by appellate court rules


(Reuters) – A federal appeals court in New York on Thursday said private student loans are not protected from payment in the event of bankruptcy.

Signs at the Navient office in Wilmington, Delaware, USA, June 9, 2021 REUTERS / Andrew Kelly

In a 21-page decision, a panel of three judges from the 2nd District Court of Appeals upheld the refusal of bankruptcy judge Elizabeth Stong to dismiss a lawsuit against student loan service company Navient Solutions LLC, alleging that it violated an earlier court order to repay the borrower’s loans. … …

George Carpinello of Boies Schiller Flexner, who represented the borrower, said in an interview on Thursday that the decision is important for people who might want to seek bankruptcy help to resolve their student loan debt but feel they cannot. because they took over the private loans are not repayable.

“What really screams about this is that Navient has been telling people for years that their loans are not repayable when in fact they are being repaid,” he said.

After graduating from Emerson College, borrower Hilal Homaidan filed for Chapter 7 bankruptcy in New York City and secured repayment of his loans in 2009. But the disbursement order is unclear whether it extends to Homaidan’s two private loans, which, according to the decision, totaled $ 12,567. Navient, who replaced Sally May as creditor, demanded their repayment anyway.

Homaidan paid off the loans, but reopened the bankruptcy case in 2017 to file an alleged class action suit against Navient, accusing him of demanding repayments on loans that were repaid as a result of bankruptcy. Navient dropped the claim, stating that loans could not be canceled in accordance with a bankruptcy provision that prevents a borrower from fulfilling a “obligation to return funds received as educational assistance.”

Navient, presented by McGuireWoods, argued that the words cover not only government loans but also private student loans, while Homaidan argued that this only applies to a narrow group of conditional grant payments.

In a ruling by District Judge Dennis Jacobs, joined by Judges Denny Chin and William Nardini, the court agreed with the bankruptcy court’s finding that the wording of the “education benefits” clause was “an unconventional way of negotiating a loan.” The court said that if Congress had intended to protect all student loans from dismissal, “it would not have done so in such a grandiose environment.”

The 5th and 10th US District Courts of Appeals have issued similar orders for private student loans.

Navient said in a statement that the appeal concerns only one aspect of the case and it will continue to defend other issues in the case.

“We understand that some student borrowers face long-term financial problems, which is why, over the years, Navient has recommended bankruptcy reform that would allow federal and private student loans to be repaid in the event of bankruptcy after a diligent repayment effort. – said Navient.

Earlier this year, Navient fended off an attempt by several student loan borrowers to force the company into bankruptcy.

Case – Hilal K. Homaidan v. Sally Mae, Inc. et al., US Court of Appeals for the 2nd Circuit, no. 20-1981.

From Homaidan: George Carpinello, Adam Shaw, Robert Tietjen and Jenna Smith of Boies Schiller Flexner, Austin Smith of Smith Law Group, Lynn Swanson and Peter Friberg of Jones Swanson Huddell & Daschbach, and Jason Burge of Fishman Haygood

For Navient: Thomas Farrell & Elizabeth Sig of McGuireWoods

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