The Tenth Circuit Court of Appeals recently issued an opinion in which the debtor was allowed to discharge over $200,000.00 in private student loans. This ruling could potentially be huge for anyone with student loans. If you’re super nerdy and want to read the opinion there is a link where you can download it at the end of this post.
In bankruptcy, unless repayment of your student loans would create an undue hardship, they are presumed to be non-dischargeable. Now it would sound easy to show that repayment of student loans would be an undue hardship, but you would be wrong. I’ll spare you the full history of student loan law, but just trust me when I say that unless you’re a quadriplegic, you probably won’t get your loans discharged. Unfortunately for many people with student loans there is simply no good option to get rid of the debt. But now that may change.
First, I’m going to be the wet blanket and tell you why you shouldn’t get too excited just yet. This is an opinion by the Eleventh Circuit Court of Appeals, which means that all bankruptcy courts in the eleventh circuit must follow it. Unfortunately we are in the Sixth Circuit, so our courts may, but are not required to follow it. This will not apply to any federal student loans you may have. This will apply to the majority of, but not all, private student loans. It is likely that it would be at least 1-2 years before a case in this district would reach the Sixth Circuit and set precedent. So don’t go sending Sallie Mae a box full of murder hornets instead of a check just yet. (Side note: As an attorney I should probably not advocate that you send boxes full of murder hornets to your student lenders. So I’m going to advocate that you do not send boxes full of murder hornets to your student lenders………yet.)
So what changed? What miracle of miracles has occurred that might allow student loans to be discharged? Well, a judge decided to read the language of the statute. If you want the full story read the opinion, but it basically boils down to this:
Under the Bankrutpcy Code, there are two sections which govern whether or not student loans can be discharged. 11 U.S.C. § 523(8)(A)(i) states that essentially all federally insured student loans are not dischargeable. 11 U.S.C. § 523(8)(A)(ii) states that an “obligation to repay funds received as an educational benefit, scholarship, or stipend” are not dischargeable. Private student lenders have always asserted, and courts have always agreed, that § 523(8)(A)(ii) covered private student loans. In a very thorough opinion, the Eleventh Circuit held that § 523(8)(A)(ii) does not apply to loans, because nowhere in that section does it mention loans at all. You’d think someone would have caught that by now. Should the Sixth Circuit ever adopt this logic, it could mean extraordinary financial relief for anyone with private student loan debt.
While this is amazing news, it will not apply to all private student loans. 11 U.S.C. § 523(8)(B) states that “any other educational loan that is a qualified educational loan” is not dischargeable. So what makes a student loan a “qualified educational loan?” Well, there are a few things, but the biggest one would be that the loan needs to be certified by the school. The school must certify that the loan does not exceed the cost of attendance. Many lenders stopped requiring certification because it took too long to process the loan, and that meant less money for them. So how do you know if your loans are qualified or not? Without looking at the contract itself you can’t know for sure, but if the money was disbursed directly to you, if the loan was to be used for living expenses beyond the cost of room and board, and if you didn’t have to go into a financial aid office to sign the loan there is a good chance your loans may not be qualified, and might be dischargeable.
So where do we go from here? Well, first there will need to be a test case. Someone will need to have a bankruptcy court rule on the matter. From there it would be appealed to the Sixth Circuit, and if the Sixth Circuit affirms the lower court ruling, then all bankruptcy courts in the Sixth Circuit would be bound. This will probably take a least a one to two years. And there is still the chance that the Eleventh Circuit case is appealed to the Supreme Court and could be overturned. While it may take a while, this is the first good news about student loans in years.
If you think your loans might not be qualified, give us a call, maybe you can be the one who sets the precedent!