A New Student Loan Discharge Case allowing the Discharge of $200,000 in Student Loans

 

A New Student Loan Discharge Case allowing the Discharge of $200,000 in Student Loans 

The 10th Circuit U.S. Court of Appeals in McDaniel v. Navient, has issued a ruling allowing the discharge  of  a debtor/borrower’s $200,000 in private student loan debt, in a Chapter 7 bankruptcy case.

An article about the case can be found at https://www.forbes.com/sites/adamminsky/2020/09/02/court-allows-bankruptcy-discharge-of-200000-in-student-loans/#90f402734fd9

In this email, we will review the facts of the case, the ruling and its applicability to individuals filing for bankruptcy in the SDNY and the EDNY.

It is estimated that the amount of student loan debt in the United States is presently $1.5 trillion. 

In McDaniel v. Navient, the U.S. Court of Appeals for the 10th Circuit affirmed a  bankruptcy court’s decision that $200,000 of a Debtor’s private student loan debt could be discharged.

What are private student loans? Monies borrowed from a private bank without a government guaranty, rather than money borrowed from a government agency or subject to a government guaranty.

Generally, to discharge student loan debt, a borrower files for chapter 7 bankruptcy and then commences an “adversary proceeding” (a lawsuit within the context of a bankruptcy case) seeking to discharge the student loans based on a concept known as “undue hardship”. 

The “undue hardship test” resulted from a bankruptcy case involving a debtor named  Brunner and the case held that in order to show undue hardship to discharge a student loan, the debtor would need to show three factors:

1. That if the Debtor were required to repay the student loan, the borrower would not be able to maintain a minimal standard of living?

2. That  the borrowers financial difficulties (that  prevent the borrower  from repaying the student loan)  are expected to continue into the future? and 

3. The borrower  made efforts to repay the   student loan prior to  filing for bankruptcy, but were unable to do so?

While the Brunner Test is  easy  to explain on paper, in practice the cost to commence and pursue this litigation is expensive and many debtor’s with student loan debt do not attempt to discharge their student loans in a chapter 7 bankruptcy filing. 

In the McDaniel case the  Debtor had  $120,000 in private student loans and she said  that Navient would not work with her to create  an affordable repayment schedule. 

Ms. McDaniel’s filed for  bankruptcy (she did not attempt to discharge her student loans) and after her case ended, Navient added additional interest and fees to her balance. She then made a motion to reopen her   bankruptcy case to have the Bankruptcy Court rule as to whether her  private student loans were dischargeable in bankruptcy.

The Bankruptcy Court then ruled that the monies sought to be discharged  were not “an obligation to repay funds received as an educational benefit” because the amount borrowed exceeded the cost of attendance at school. 

As a result the monies were not a student loan and the undue hardship did not apply and the student loans were dischargeable as regular debt in the chapter 7 bankruptcy case.

Navient appealed, and the 10th Circuit Court of Appeals affirmed the lower bankruptcy court’s decision. 

What is the take aware for student loan borrowers in this district?

First, the decision only applies to Colorado, New Mexico, Oklahoma, Utah, and Wyoming (10th Circuit). However, since the decision was from a Court of Appeals, bankruptcy courts in this district may affirm or adopt the Court’s  ruling and reasoning. 

Second,  the ruling may only affect the dischargeability of private student loans, not public student loans and the vast majority of student loans are public.

Third, the ruling may only apply to private student loans that exceed the cost of attendance at a school,  rather than all private student loans.

Fourth, bankruptcy is a court of equity and bankruptcy judges are aware of the amount of student loan debt outstanding and the hardship that it causes borrowers and their families and they are sympathetic to debtor’s attempting to discharge their student loans to get the “fresh start” in bankruptcy. 

Fifth, the Brunner Test dates back to 1987 and its holding and applicability to 2020 have been challenged by many bankruptcy experts. 

Sixth, student loan debtors with the right fact patterns should consider filing for chapter 7 bankruptcy and attempting to discharge their student loans.  Jim Shenwick