The Second District states that some private student loans can be repaid under Section 523 (a) (8) (A) (ii) | Jones Day



On July 15, 2021, a panel of three judges of the United States Court of Appeals for the Second Circuit held in St. Homaidan vs. Sally Mae, Inc. and etc. that the private student loans in question did not qualify for exemption under Section 523 (a) (8) (A) (ii) of the Bankruptcy Code for the “obligation[s] to pay the funds received as an educational allowance. ” In the following bankruptcy court case, the defendant, the creditor and the support staff (hereinafter the “creditor”) petitioned for the dismissal of the Chapter 7 bankruptcy debtor’s adversarial proceedings, claiming that the creditor violated the bankruptcy ward by accepting repayment of private student loans that were actually repaid because they covered more than qualified education costs. The defendant argued that the loans were not repayable. The bankruptcy court found the “obligation” exemption[s] to recover funds received as education grant “under section 523 (a) (8) (A) (ii) of the Bankruptcy Code and found that it” does not repay all education-related debts “, including student loans in question. Thus, he dismissed the defendant’s motion to discontinue the case. The Second District granted and confirmed the interlocutory appeal.

Second District Decision

Like the Bankruptcy Court, the Second Circuit relied heavily on the simple language of the relevant legislative text, which exempts, inter alia, “an obligation.[s] for the payment of funds received as an education grant, scholarship or scholarship ”. Solution at 9; see also 11 USC § 523 (a) (8) (A) (ii). The respondent creditor’s only claim in its dismissal motion was that the plaintiff’s private student loan was an “educational benefit” under Section 523 (a) (8) (A) (ii). However, the respondent reserved the right to consider the plaintiff’s claims that the loans were not a “qualified education loan”.[s]”pursuant to section 523 (a) (8) (B) later in the proceedings.

The Second Circuit concluded that section 523 (a) (8) (A) (ii) could not be interpreted to include “loans” if that particular word was used in the relevant provisions and, in particular, was absent from the regulation. The court also noted that it could not accept a broad interpretation of this provision by the respondent – “according to which any loan is non-repayable under section 523 (a) (8) (A) (ii) if it was used for further training” -[as it] will attract virtually all student loans within the “exemption. This, in the court’s opinion, would incorrectly make the exceptions in Section 523 (a) (8) (A) (i) and 523 (a) (8) (B) meaningless.” Thus, the phrase “education grant” was restricted by the court to reconcile with the terms “scholarship” and “scholarship” also referred to in section 523 (a) (8) (A) (ii). in satisfying the petition, the court did not come to a conclusion as to whether the plaintiff’s loan was actually repaid in his bankruptcy, and returned the case to the bankruptcy court for further consideration.

Impact on future litigation

The Second District decision does not fully clarify the rules for paying student loans. Indeed, the court did not consider whether the private student loans in question were a “qualified education loan”.[s]”and thus are not exempt from liability under section 523 (a) (8) (B). Moreover, the decision does not affect government student loans at all, which are exempt from repayment in the absence of a finding that repayment of the debt may result in the debtor having “unreasonably difficult difficulties.” Thelma G. McCoy v. United States, Plaintiff recently petitioned the US Supreme Court for an order to resolve a district dispute on an appropriate test to assess “undue hardship.” However, in June 2021, the court rejected the motion, leaving the sprawling network intact and opening the door to the continuation of the controversial decisions.


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