What Changes the Homaidan Case With regard to Private Student Loans in Bankruptcy? | McGlinchey Stafford


The impossibility of repaying private student loans through bankruptcy proceedings has long been considered almost absolute, but the decision of July 15, 2021 No.Homaidan v. Sally Mae) The US Court of Appeals for the Second Circuit suggests that this is not always the case.

However, contrary to many headlines surrounding the case, the Court of Appeal did not generally rule that private student loans should be repayable. Rather, the Court narrowly held that the creditor’s exemption exemption, which it had invoked in its appeal, was not legally applicable to the private student loan in question.

For analysis: The US Bankruptcy Code (Code) makes certain education debts irrecoverable (excluded from repayment) without showing undue hardship for the debtor and his dependents. In the relevant part Section 523 of the Code lists three bad debt for education as:

  • An overpayment or loan of educational assistance provided, insured, or guaranteed by a government agency, or provided under any program funded in whole or in part by a government agency or non-profit organization.
  • Obligation to return funds received as education grant, scholarship or scholarship.
  • Any other education loan that is an education loan as defined in section 221 (d) (1) of the Internal Revenue Code, 1986, and received by a debtor who is an individual.

The problem is in Homaidan Whether the borrower’s loan qualifies for the “education grant funds” exception. The creditor argued that the debt should be exempted from repayment under this exception, but the appellate court found this argument unconvincing, in large part because the exception for education grant funds did not directly apply to loans (unlike two other exceptions, which use the word “loan”) and was instead limited to contingent grant payments similar to fellowships and fellowships. Based on this rationale, The Court of Appeal confirmed the refusal of the defendant’s creditor to satisfy the petition.

It is important to note that the only issue resolved by the court was whether the exemption from payments related to the obligation to repay funds received as education grant applied to private student loans. The court said that this was not the case, but the court did not analyze the scope of the “qualified education loan” exception with respect to repayment options. Therefore, we believe that this case should not be seen as a significant change in the repayment of private education loans. Most private education loans meet the definition of “qualified education loans,” a typical exception that private education loan lenders rely on. In most cases, the practical effect of this exception would mean that the borrower will not be able to repay the loan unless the borrower can prove to the court that repaying the loan will be undue difficulty. IN Homaidan the case did not change this outcome.

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