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Student loan giant loses another case about private debt discharge in bankruptcy

Student borrowers with certain types of private loans came closer to being able to pay off that debt in bankruptcy after a New York court ruling.

On Thursday, the US Court of Appeals for the Second Circuit sided with student debtor Hilal Homaidan against student loan giant Navient (NAVI), which had argued that private student loans could not be cleared under existing bankruptcy laws.

A panel of three judges ruled that certain private student loans can be waived through bankruptcy in certain cases, as can credit cards and other debts, if certain conditions are met.

“Navient’s broad reading – under which any loan is non-cancellable under § 523(a)(8)(A)(ii) if used to further one’s education – would virtually all student loans within the scope of § 523( a) put on (8)(A)(ii),” stated Circuit Judge Dennis Jacobs. “That construction proves too much.”

The ruling, along with similar rulings in the Fifth and Tenth Circuits, suggests that private loan managers like Navient will struggle to claim that all private student loans are non-repayable in bankruptcy.

“It creates a kind of domino effect…where you have three court cases that say this kind of student loan can be forgiven,” Jason Iuliano, an associate professor of law at the University of Utah and an expert on student loan bankruptcy law, told me. Yahoo Finance. “You’re going to make lawyers think more about this… and really rethink their categorical advice that they’re giving everyone that student loans can’t be forgiven.”

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

A spokesperson for Navient, which split from Sallie Mae in 2014, told Yahoo Finance that the latest ruling only applies to one matter in the appeal and that the company “has advanced multiple defenses and looks forward to presenting these defenses as the case progresses.” progressing.”

At the same time, citing current push to reform the bankruptcy code, the company added: “We recognize that some student borrowers face long-term financial challenges, and this is why Navient has been recommending bankruptcy reform for several years that would allow federal and private student loans to be forgiven in bankruptcy after trying to repay in good faith.”

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Navient can ‘no longer claim private student loans are non-redeemable’

Student loans have traditionally been considered non-payable in personal bankruptcy or eligible only under very limited circumstances, with different guidelines for private and government-backed debt.

There is approximately $100 billion in outstanding private student debt and more than $1.56 trillion in outstanding federally secured student debt.

According to Homaidan’s attorneys, up to or more than $50 billion in private student loans could be forgiven in bankruptcy because those loans were made to fund studies at unaccredited schools or did not provide an “educational benefit” as defined by law.

For Navient, “one of the defenses … was that this [private student loans] are non-dischargeable in bankruptcy, and is a kind of protected loan or benefit in statute,” Adam Shaw, a partner at Boies Schiller Flexner LLP, which represented Homaidan, told Yahoo Finance.

But, Shaw added, the latest ruling suggests that Navient “can no longer argue that private student loans cannot be waived in bankruptcy as educational benefits.”

Along with the other recent cases, the latest ruling adds to a growing trend in which student debtors could claim that loans taken out to either attend an unaccredited program or are being used to fund student expenses. beyond the educational benefits may be waived in bankruptcy proceedings.

Tuition Fees Answer Loans

Homaidan attended Emerson College from 2003 and 2007, taking out direct-to-consumer loans called “Tuition Loans” from Sallie Mae, Navient’s predecessor. The loans totaled approximately $12,500.

Tuition loans, which were first offered by Sallie Mae in 2004, according to the company’s 2008 10-K SEC filing, did not come through the school’s financial aid office. Instead, TV commercials sold the loans directly to consumers, and the money went straight to bank accounts, according to court documents.

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 eventually obtained a discharge order from the bankruptcy court, but the order did not specify which debts were forgiven.

Navient then hired a collection agency to recoup the loans. Homaidan, confused, assumed the loans had not been repaid and he paid Navient in full.

In 2017, he proceeded to reopen his bankruptcy case to determine that those college tuition loans had actually been waived during the original proceeding. Navient pushed back, arguing that those loans were discharged under 11 USC § 523(a)(8)(A)(ii). The second district rejected Navient’s argument, ruling that Homaidan’s tuition loan loan was “outside the scope” of that law.

An unidentified man exits United States Bankruptcy Court in Lower Manhattan in New York City. (Photo by Ramin Talaie/Corbis via Getty Images)

At the end of 2007, Sallie Mae owned $3.3 billion in tuition loans. The company stopped providing new tuition loans in 2008.

Shaw estimated that of that $3.3 billion, there could be about 300,000 loans with $500 million in outstanding debt comparable to Homaidan’s: potentially forecloseable but still the target of collections.

“Hundreds of thousands, if not millions of people who have either turned away from bankruptcy or who thought they were ineligible for [with student loans]… it’s safe for them to re-examine their luck,” Austin Smith of Smith Law Group, another Homaidan attorney, told Yahoo Finance.

Aarthi is a reporter for Yahoo Finance. She can be reached at [email protected] Follow her on Twitter @aarthiswami.

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