Second Circuit Affirms That Some Private Student Loans Are Dischargeable in Bankruptcy

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Overview

In Hilal K. Homaidan v. Sallie Mae, Inc., Navient Solutions, LLC, Navient Credit Finance Corporation, Case No. 20-1981 (2d Cir. 2021), the Second Circuit affirmed the opinion of the U.S. Bankruptcy Court for the Eastern District of New York, which held that private student loans are not excepted from discharge under Section 523(a)(8)(A)(ii) of the Bankruptcy Code, which excepts from discharge “an obligation to repay funds received as an educational benefit, scholarship, or stipend.” 11 U.S.C. § 523(a)(8)(A)(ii).

Background

Hilal K. Homaidan received private educational loans totaling $12,567 from Sallie Mae Inc. (and successor Navient Solutions LLC and Navient Credit Finance Corporation) (collectively, “Navient”), which he used to fund his education at Emerson College. Shortly after graduating, Mr. Homaidan filed for Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the Eastern District of New York. The bankruptcy court’s discharge order was ambiguous as to whether the Navient loans were discharged.

After the bankruptcy proceeding was closed, Navient demanded repayment of the loans, which caused Mr. Homaidan to assume that the loans had not been discharged and led Mr. Homaidan to pay the Navient loans in full. Thereafter, Mr. Homaidan reopened the bankruptcy case and commenced an adversary proceeding against Navient seeking, among other things, actual damages for Navient’s alleged violation of the discharge order.

The U.S. Bankruptcy Court for the Eastern District of New York determined that the Navient loans were not excepted from discharge under Section 523(a)(8)(A)(ii), see Homaidan v. SLM Corp. (In re Homaidan), 596 B.R. 86, 107 (Bankr. E.D.N.Y. 2019), and Navient appealed.

Second Circuit Opinion

As summarized by the Second Circuit, the Bankruptcy Code lays out three categories of educational debt that cannot be discharged in bankruptcy absent a showing of undue hardship: (i) loans and benefit overpayments backed by the government or a nonprofit; (ii) obligations to repay funds received as an educational benefit, scholarship or stipend; and (iii) qualified private educational loans. See 11 U.S.C. § 523(a)(8). Navient argued that its loans are covered by the second category as its loan agreement constitutes an “obligation to repay funds” which Mr. Homaidan obtained for the purpose of advancing his education, thereby deriving from them an “educational benefit.”

The Second Circuit held that Navient’s interpretation violated several rules of statutory construction. Navient argued that the ordinary public meaning of “an obligation to repay funds received as an educational benefit” includes student loans. However, as the bankruptcy court explained, that would be “an unconventional way to discuss a loan.” In re Homaidan, 596 B.R. at 102. The Second Circuit noted that if Congress had intended to except all educational loans from discharge, it would not have done so in such stilted terms. Additionally, the court rejected Navient’s attempt to read “loan” into Section 523(a)(8)(A)(ii), noting that “loan” does not appear in Section (ii), as it does in Section (i) and Section (iii). Finally, the Second Circuit rejected Navient’s broad reading of Section 523(a)(8)(A)(ii), which would draw virtually all student loans within the scope, rendering other sections of the statute superfluous. The court determined that the term “educational benefit” is best read to refer to conditional grant payments similar to scholarships and stipends, i.e., terms that describe payments not generally required to be repaid, unlike a loan. 

Thus, based on various canons of statutory construction, the Second Circuit upheld the Bankruptcy Court for the Eastern District of New York’s decision and deemed Mr. Homaidan’s private student loans dischargeable under Section 523(a)(8)(A)(ii) of the Bankruptcy Code.

Why This Case Is Interesting

The Second Circuit’s opinion is significant because it may now be easier for student loan borrowers to discharge private student loans in bankruptcy. The decision may counteract, in part, the widespread yet overly simplistic impression that private student loans are not dischargeable absent an “undue hardship.” This decision falls in line with earlier decisions by the Fifth and Tenth Circuits, which similarly held that an educational loan does not constitute “an obligation to repay funds received as an educational benefit” under Section 523(a)(8)(A)(ii) of the Bankruptcy Code. See McDaniel v. Navient Sols., LLC (In re McDaniel), 973 F.3d 1083 (10th Cir. 2020); Thomas v. Dept. of Educ. (In re Thomas), 931 F.3d 449, 450 (5th Cir. 2019).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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