These student loans can be repaid in bankruptcy: court decision

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Ben Franklin on the US currency in the mortar board (Photo: Shutterstock)

The US Court of Appeals for the Second Circuit ruled for the first time that private student loans can be repaid in the event of bankruptcy, which is a big win for borrowers who are financially struggling to pay off their loans.

A unanimous panel of the Court of Appeals in Manhattan ruled that loans do not qualify as a type of “education grant” that can be exempted under federal law.

IN decision supported the decision of the Brooklyn judge to file for bankruptcy in favor of the borrower Hilal Homaidan, who argued that the lender Navient Solutions had long been involved in a “scheme” of disbursing repayable loans to unsophisticated student borrowers with subsequent demand for repayment even after the loans were repaid as a result of bankruptcy.

Homaidan, an Emerson College graduate, has sought to bankrupt more than $ 12,500 in private loans to pay for his education. He is one of potentially hundreds of thousands of plaintiffs in the proposed Navient bankruptcy panel in Brooklyn.

Navient and its attorneys McGuireWoods argued that its loans were subject to a federal law provision protecting “the obligation[s] for the payment of funds received as an education grant, scholarship or scholarship “from dismissal from bankruptcy.

US District Judge Dennis Jacobs, however, dismissed Thursday’s interpretation of the statute as being overly broad, saying Navient’s proposed outcome would “cover virtually all private student loans.”

By contrast, the defining characteristic of a loan is an unconditional commitment to repay it, Jacobs wrote to the commission.

“Thus, the ‘education grant’ is best read as referring to conditional grant payments similar to scholarships and fellowships,” the judge said.

The decision, which did not apply to government-backed loans, brought the Second Circuit in line with two other district courts that had examined the issue.

Homaidan is represented by attorneys at Boies Schiller Flexner in New York; Jones, Swanson, Haddell & Dashbach and Fishman Haygood in New Orleans; and Smith’s Law Group.

Adam Shaw, a partner with Boyce Schiller, said in an interview that borrowers such as Navient have for years “illegally collected” repaid loans using an “unnatural attempt to squeeze” loans into the law. According to him, the decision made on Thursday will affect the entire lending industry.

“This should really put an end to the arguments of Navient and other lenders that these types of loans are educational aids,” Shaw said.

“This is a lot of money. These are billions of dollars, ”he added.

Navient’s attorney did not immediately respond Thursday to a request for comment.

Navient said in a statement that the appeal “concerns only one issue in the case, and Navient has put forward several defense arguments and hopes to present those arguments in the course of the case.”

“We understand that some student borrowers are facing 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,” the company said. …

The US Bankruptcy Code permits the repayment of student loan debt if repayment would cause “unreasonable hardship” for the borrower. In recent years, district courts have become divided over the question of which test to use in determining whether a borrower is facing such difficulties.

Last month, the US Supreme Court refused to challenge the Fifth Circuit’s strict interpretation of the standard, which requires debtors to demonstrate “complete inability” to repay loans.

The Second District decision on Thursday, however, did not affect the unresolved split. Instead, he considered the threshold question of whether private loans are indeed protected as part of the bankruptcy process, and will provide borrowers with additional options to repay their loans.

“We are committed to preventing Navient from collecting repaid loans across the country, and are committed to helping every student borrower recover funds that have been inappropriately demanded from them,” Shaw said in a statement.

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