Thursday, April 12, 2018

A ray of hope for (some) student loan debtors

Here at Shenwick & Associates, many of the people we work with have student loan debt.  This should come as no surprise, considering that Americans owe more in student loan debt than credit card debt.  We’ve written about student loan debt and how difficult it is to discharge in bankruptcy previously (mostly recently here).  This month, we wanted to tell you about a pending case that may offer hope for some student loan debtors.

Let’s start by looking at the relevant provision of the Bankruptcy Code.  Section 523 governs exceptions to the discharge of debt, and § 523(a)(8) provides that:

A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt-unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for-an educational benefit overpayment or loan 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; or an obligation to repay funds received as an educational benefit, scholarship, or stipend[.]

This case (Haas v. Navient Solutions) revolves around the question of what an “educational benefit” is.  One of the co–plaintiffs (Haas) borrowed money to prepare for the Texas bar exam in 2009.  The other co–plaintiff (Shahbazi) borrowed money to attend a unaccredited technical school in Virginia in 2002.  Haas filed for bankruptcy in 2015 and Shahbazi filed for bankruptcy in 2011.  In both cases, the debtors listed the debt to Navient’s predecessors (which we will just refer to Navient, since two Navient entities are the co–defendants) as non–priority general unsecured claims instead of priority unsecured claims.  Navient was notified of the discharge, but instead of filing adversary proceedings (bankruptcy litigation) to contest the dischargeability of these debts, Navient and various collection agencies continued to try to collect on these debts, which the co–plaintiffs allege to be in violation of the discharge injunction in § 524(a)(2) of the Bankruptcy Code.

So Haas and Shahbazi filed their own adversary proceeding against Navient, contending that the debts they were incurred were not “Qualified Education Loans” excepted from discharge, but instead “Consumer Education Loans” that targeted students attending unaccredited schools, and seeking class–action status.   Navient moved to dismiss the case, which was denied last month.

The case is far from over, and if even if the plaintiffs and their class are successful, this would only affect a small portion of student loan debtors.  In our experience, most clients have qualified educational loans, which are very difficult to discharge in bankruptcy without undue hardship.  However, for student loan debtors who have been on the ropes since the seminal Brunner decision and the changes to dischargeability of educational loans in BAPCPA, this is welcome news.  For any questions about your student loan debt, please contact Jim Shenwick.

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