Student loan giant loses yet another private debt case in bankruptcy

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Student borrowers with certain types of private loans gradually approached the opportunity pay off this debt as a result of bankruptcy after a New York court ruling.

Thursday, U.S. Court of Appeals for the Second Circuit unilateral with student debtor Hilal Homaidan vs. student loan giant Navient (NAVI), which argued that private student loans could not be canceled under current bankruptcy laws.

A panel of three judges determined that certain private student loans can be repaid in certain cases through bankruptcy, like credit cards and other debts, subject to certain conditions.

“The broad interpretation of Navient is that any loan is non-repayable in accordance with §523 (a) (8) (A) (ii) if it had been used to continue education, it would have attracted virtually all student loans under § 523 (a) (8) (A) (ii), District Judge Dennis Jacobs said. “It proves too much.”

Resolution, along with similar resolutions of the Fifth and Tenth circuit, suggests that private loans such as Navient will struggle to claim that all private student loans are non-repayable in the event of bankruptcy.

“It kind of creates a domino effect … when you have three appeals cases that say this type of student loan can be released,” said Jason Iuliano, associate professor of law at the University of Utah and student expert. bankruptcy loan law, Yahoo Finance reported. “You’re going to make lawyers think more about it … and really rethink their definitive advice they give everyone that student loans can’t be repaid.”

Louisville, Kentucky - May 28: A former Jefferson County public school student grins and looks away in a cap and dress during a makeup graduation ceremony at Central High School on May 28, 2021 in Louisville, Kentucky.  The makeup ceremony was held in honor of students whose graduation was disrupted by the coronavirus pandemic last year.  (Photo by John Cherry / Getty Images)

Graduated on May 28, 2021 in Louisville, Kentucky. (Photo by John Cherry / Getty Images)

In a statement to Yahoo Finance, Navient argued that the latter decision applies to only one issue on the appeal and that the company “has raised several objections and hopes to present them along the way.”

At the same time, referring to ongoing attempts reform the bankruptcy code, the company added: “We are aware that some student borrowers are facing long-term financial problems, which is why, for several years, Navient has recommended bankruptcy reform that would allow federal and private student loans to be repaid in the event of bankruptcy after receiving a good – effort of faith. to pay back the debt. “

Navient “can no longer claim that private student loans are non-repayable”

Student loans have traditionally considered not repayable in the event of personal bankruptcy or only eligible under very limited circumstances, with different guidelines for private and public debt.

About $ 100 billion outstanding private student debt and more than $ 1.56 trillion. federal student debt

Homaidan’s lawyers said private student loans of up to or more than $ 50 billion could potentially be repaid in the event of bankruptcy because the loans were made to finance tuition in non-accredited schools or did not serve an “educational benefit” as defined by law.

For Naviente, “one of the defenses … was that these [private student loans] are not repayable in the event of bankruptcy and are a type of secured loan or exemption under the law. ”- Adam Shaw, Partner at Boies Schiller Flexner LLP, who represented Homaidan, said Yahoo Finance.

But, Shaw added, the latest ruling suggests Navient “can no longer argue that private student loans are non-repayable in the event of bankruptcy as education benefits.”

Along with other recent cases, the latest ruling reinforces the growing trend in which student debtors may argue that loans taken to either participate in an unaccredited program or used to fund student expenses other than education grants are subject to bankruptcy proceedings.

Tuition Fee Loans

Homaidan attended Emerson College from 2003 to 2007, receiving direct consumer loans called “Tuition Loans” from Sally Mae, Navient’s predecessor. The total amount of loans was about USD 12,500.

The tuition fees that were first offered to Sally Mae in 2004, according to the company. Registration 10-K SEC 2008, did not come through the school’s financial aid office. Instead, TV spots sold loans directly to consumers and, according to court documents, the funds went straight into bank accounts.

After graduation, Homaidan filed for Chapter 7 bankruptcy in the US Bankruptcy Court for the Eastern District of New York. In that petition, he listed the Navient loans as liabilities and ultimately received a bankruptcy order from the court, but the order did not specify which debts were repaid.

Navient then hired a collection firm to repay the loans. Baffled, Khomaidan suggested that the loans had not been repaid and paid Navient in full.

In 2017, it went into bankruptcy retrial to determine whether these tuition fees were actually repaid in the course of the original proceedings. Navient rejected the offer, arguing that these loans were not repayable in accordance with the terms 11 USC § 523 (a) (8) (A) (ii)… The Second District rejected Navient’s argument, ruling that Homaidan’s tuition fee was “outside the scope” of the law.

An unidentified man leaves the Lower Manhattan Bankruptcy Court in New York City.  (Photo by Ramina Talai / Corbis via Getty Images)

An unidentified man leaves the Lower Manhattan Bankruptcy Court in New York City. (Photo by Ramina Talai / Corbis via Getty Images)

Late 2007 Sally Mae held $ 3.3 billion in tuition fees. The company, which spun off its loan servicing operation called Navient in 2014, stopped issuing new student loans in 2008.

Shaw estimated that of that $ 3.3 billion, there could have been about 300,000 loans, including $ 500 million in outstanding debt, which were similar to Homaidan’s debt: potentially repayable, but still aimed at collection.

“Hundreds of thousands, if not millions, of people who have been denied bankruptcy or who thought they were not eligible [with student loans]… it’s safe for them to test their luck again, ”Austin Smith of Smith Law Group, another Homaidan lawyer, told Yahoo Finance.

Aarti is a correspondent for Yahoo Finance. She can be contacted at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami

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