On August 31, 2020, the 10th Circuit of the U.S. Court of Appeals, handed down an opinion on private student loans in McDaniel v. Navient that has a lot of people talking. Many have taken this ruling as a sign that the bankruptcy discharge protection afforded private student loans in the bankruptcy code since 2005, is starting to erode. News stories are saying that the courts are starting to chip away at the protections private loans currently receive, and that eventually, those protections will be gone.
That, unfortunately, is not the case. Despite the hooplah, the "undue hardship" test is still alive and well in New Jersey and most other federal districts. Private student loans are still very difficult to discharge.
Exactly Where Do Student Loans Get Their Protection?
When it comes to student loans, the bankruptcy code sets forth exceptions from discharge in three categories:
- Loans “made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution.” Basically federal loans and any loans backed by states, like New Jersey CLASS loans, with nonprofit lenders tacked on.
- “An obligation to repay funds received as an educational benefit, scholarship, or stipend.”
- Any other “qualified education loan” incurred by an individual debtor. Where private student loans come in.
This last one was added when the bankruptcy code was revised in 2005 and has been the bane of private student loan borrowers ever since. But as the court in McDaniel states, “unless an educational debt falls within one of these classifications, it is dischargeable through the normal bankruptcy process,” i.e. no need to prove undue hardship.
Clearly the McDaniels’ loans did not fall under the first category, which left the other two.
Were the Loans “Qualified Education Loans”?
The McDaniels, in their pleadings, claimed that the loans were dischargeable because they were in an amount in excess of the cost of attendance for that school, and as such, were not “qualified.” Navient responded that the loans were non-dischargeable, not because they were qualified student loans, but because they were an obligation to pay funds received as an educational benefit under the second classification.
The trial court ruled against them, and Navient appealed.
What is interesting here is that Navient did not argue against the McDaniels that the loans were not “qualified”; they hung their hat on the “educational benefit” language in Category 2. Thus, I suspect, as many student loan lawyers do, that Navient knew that the debtors were correct on the loan amounts when compared to cost of attendance, and as such, the loans were not "qualified."
So Why Did Navient’s Strategy Fail?
So why did they go with Category 2? This may have been in the hopes that the 10th Circuit would agree with other courts that have held that that category is a “catch all” provision to cover all loans not encompassed Category 1. Unfortunately, nowhere in Category 1 does the word “loan” appear, and Navient could not claim that these weren’t loans.
Unfortunately for Navient, the 10th Circuit court affirmed the trial court ruling. In doing so they did not define a “loan” as an “educational benefit”; they did not see the terms as interchangeable.
So What’s the Take-Away?
They key point here is that non-qualified private student loans have always been dischargeable without proving “undue hardship,” so there is nothing new there. However, what the McDaniel case does stand for is that private student loan lenders cannot take refuge in Category 2 if their loans aren’t “qualified” under Category 3, or they can’t come up with the evidence to prove that they are. They are just out of luck.
So if you have a private student loan that you need to discharge, you need to ask questions and investigate to see if it is a qualified private loan. A loan can be unqualified for many other reasons besides it being in excess of the cost of attendance, and knowing that could save you a lot of trouble by not having to prove undue hardship.
Need Help Getting the Answers to Those Questions?
As an experienced student loan and bankruptcy lawyer, I can help you to determine if your private student loans are "unqualified," and thus dischargeable. If you live in Burlington, Camden, Gloucester, Salem, Atlantic or Cumberland County, have private student loans that you can't afford to pay, are contemplating bankruptcy for other reasons, and are ready to take action, then call my office today at 856-432-4113 to schedule an appointment for a consultation. Getting rid of those student loans may be easier than you think!
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