On April 4, 2016, the U.S. Bankruptcy Court for the Eastern District of New York issued a decision that may significantly change the landscape of student debt relief. In re Decena, No. 15-72903, 2016 WL 1371031 (Bankr. E.D.N.Y. Apr. 4, 2016). Per Judge Robert Grossman, the court discharged the student loan of a hapless medical school graduate who studied at a non-accredited medical school in West Africa. The court found that the loan did not fall under the exceptions to debt relief in the federal bankruptcy code, which would have prevented the court from discharging the debt.
The debtor studied at St. Christopher’s College of Medicine in the country of Senegal, where she graduated in June 2004. She enrolled at that medical school based on the school’s misrepresentation that it was an accredited medical school, which would have permitted the debtor to sit for U.S. medical board examinations to qualify for medical practice. When she returned to the United States, she discovered that she in fact ineligible to sit for the exams.
To pay for her studies, she had applied for a student loan with Citizens Bank, a Rhode Island based private banking institution. That loan application indicated that the school was St. Christopher’s College of Medicine, which is not on the Federal School Codes List of eligible education institutions for student loans. However, the application used the code for a school based in Berlin, Germany, which is not affiliated with the Senegalese school. Although the debtor attempted to repay the loan from 2006 to 2011, she came up $161,591 short in her repayment to Citizens Bank.
In July 2015, the debtor filed a voluntary petition for bankruptcy under Chapter 7 of the Bankruptcy Code. In October 2015, she filed a complaint for declaratory judgment against Citizens Bank, seeking to declare the student debt as discharged in bankruptcy. Because Citizens Bank did not answer the complaint, the court found that the bank was in default, and therefore examined the debtor’s petition to determine if she made out of prima facie case for discharge of her debt.
The court considered whether the student loan was a non-dischargeable debt under 11 U.S.C. § 523(a)(8). That provision prevents the discharge of student loans that constitute “an educational benefit, scholarship, or stipend”; or “any other educational loan that is a qualified educational loan.” The provision also prevents the discharge of student loans made by governmental agencies or under the auspices of nonprofit institutions.
Judge Grossman notes that several courts had treated “educational benefit” under § 523(a)(8) as a catch-all term, meaning that any student loan would be non-dischargeable.[i] Judge Grossman disagreed with those decisions. After applying an analysis of the text and legislative history of the statute, he concluded that “educational benefit” was intended to designate alternatives to student loans – like scholarships and stipends, which are not typically repaid unless the recipient fails to meet conditions for receiving the funds. As such, the loan in question was not an “educational benefit” that was non-dischargeable.
Furthermore, the debtor’s loan from a private bank did not fall under the remaining categories of non-dischargeable education-related debts under § 523(a)(8) – it was not a government loan, nor was it a “qualified educational loan” (a reference to accredited schools that are on the Federal School Code List). Rather, it was a private loan for a non-accredited Senegalese medical school. Accordingly, the court declared that the debtor’s student loan was in fact dischargeable and relieved the student of her debt. Because the court ruled in the debtor’s favor on the basis of the school’s ineligibility for student loans, this case may have broader implications for other student loans for schools that are not on the Federal School Code List.
[i] See In re Corbin, 506 B.R. 287, 296 (Bankr. W.D. Wash. 2014); In re Beesley, No. 12–2444–CMB, 2013 WL 5134404 (Bankr. W.D. Pa. Sept. 13, 2013); In re Roy, No. 08–33318, 2010 WL 1523996 (Bankr. D.N.J. Apr. 15, 2010); In re Carow, No. ADV 10–7011, 2011 WL 802847 (Bankr. D.N.D. Mar. 2, 2011); In re Skipworth, No. ADV. 09–80149–JAC–7, 2010 WL 1417964 (Bankr. N.D. Ala. Apr. 1, 2010).