On July 15, the US Court of Appeals for the Second Circuit ruled that private student loans are not exempted from the debtor’s liability under Chapter 7 bankruptcy.
IN GomadskyThe borrower, after graduating from Emerson College, filed for Chapter 7 bankruptcy in 2007 and was laid off in 2009. The waiver order did not specify whether it applied to the borrower’s two private student loans totaling $ 12,567. The loan agent demanded repayment of the loans, which the borrower eventually repaid in 2017.
Shortly thereafter, the borrower reopened the bankruptcy case to file an alleged class action lawsuit against the lender for violating the repayment order. The support staff proceeded to layoff, arguing that Section 523 (a) (8) (A) (ii) of the Bankruptcy Code prevented the repayment of loans. At the same time, the support staff argued that the term “educational allowance” covers all private student loans. The District Court disagreed, finding that the text and structure of Articles 523 (a) (8) and § 523 (a) (8) (A) (ii) exempted a much narrower category of debt. The service agent filed a midterm appeal and the Second District confirmed it.
The only question to be considered was “whether the loans in question constituted an“ obligation to pay back funds received as an educational benefit ”and were therefore exempted under § 523 (a) (8) (A) (ii)” …
The Second District has determined that, pursuant to section 523 (a) (8), three categories of loans cannot be repaid:
- loans and overpayments on benefits provided by the government or a non-profit organization;
- Obligations to return funds received as an education grant, scholarship or scholarship; as well as
- qualified private education loans.
The support staff did not claim that the loans fell into the first or third category. Instead, the support staff argued that the loan agreements provide for a “repayment obligation” and that the funds were received to improve the borrower’s educational level, thereby gaining “educational benefits” from them.
The Second District began reviewing the statutory interpretation of the US Bankruptcy Code to determine the basic meaning of the term “education grant” in the text. However, the court found that the clear meaning of the text did not support the interpretation of the attendants. Instead, it found that if Congress had intended to exclude all student loans from the statement under Section 523 (a) (8) (A) (ii), “it would not have done so in such a grandiose environment.” Moreover, the court found that the term “education grant” is best read as referring to contingent grant payments such as scholarships and scholarships, and does not apply to all private student loans. In fact, the Second Judicial Circuit determined that, in the service provider’s understanding, “the term ‘educational allowance’ would cover virtually all private student loans,” which the court categorically rejected.
The court’s ruling puts it in line with the Fifth and Tenth Circuits, which also issued similar orders on private student loans.