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Certain Private Educational Loans Currently Subject to Discharge in Bankruptcy

As student loan debt in the United States reaches record highs with an overwhelming percentage of college graduates unable to repay their school loans even after obtaining their degree, some of those private school loans alleged to be for educational purposes may be dischargeable through bankruptcy.

Currently, bankruptcy courts across the United States are split on the issue of whether a debtor can discharge certain private loans alleged to confer an educational benefit on the debtor. The Tenth Circuit has yet to rule on the issue; however, the issue is currently on appeal.

Notwithstanding, at least one decision from the United States Bankruptcy Court for the District of Colorado has held that an “obligation to repay funds received as an educational benefit, scholarship or stipend,” as set forth in 11 U.S.C. Section 523(a)(8)(A)(ii) of the bankruptcy discharge exception for student loan debt, does not include a loan. McDaniel v. Navient Solutions, LLC (In re McDaniel), 590 B.R. 537 (Bankr. D. Colo. 2018).

In McDaniel v. Navient Solutions, LLC, Judge Kimberley H. Tyson distinguished between private loans and obligations to repay funds received as an educational benefit, scholarship, or stipend, holding that private loans are not subject to the exception set forth in 11 U.S.C. Section 523(a)(8)(A)(ii), and therefore, non-qualifying private loans are subject to discharge under 11 U.S.C. Section 1328 of the Bankruptcy Code. Specifically, the Court found that the statutory language and omission of the word “loan” in Section 523(a)(8)(A)(ii) warrants a finding that “an obligation to repay funds received as an educational benefit, scholarship or stipend” does not include a private loan since a loan does not constitute a conditional grant the same way a scholarship or stipend.

Other bankruptcy courts across the United States have agreed with Judge Tyson’s reasoning and decision, while other courts have disagreed. Thus, it is likely that the United States Supreme Court will take up the issue in the near future regarding whether otherwise non-qualifying private loans intended to confer an educational benefit are dischargeable under Section 523(a)(8)(A)(ii) or not.

What does this mean for debtors currently? At this time, it means that discharging private student loan debt in the Tenth Circuit through an adversary proceeding in bankruptcy court may be an option for debtors with private non-qualifying educational loans unless and until the Tenth Circuit or United States Supreme Court issues a decision determining otherwise. Please contact me should you wish to discuss your specific situation and whether discharging a private, non-qualifying educational loan may be an option for you.

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