Private Student Loans Discharged in Bankruptcy

A recent decision in the Fifth Circuit Court can change the fate of private educational lenders.

In Crocker v. Navient Solutions, the court upheld a decision by the Southern District of Texas that not all private educational loans are not exempt from discharge.

Two different cases resulted in student loans from Navient being discharged In Chapter 7 bankruptcies. Navient continued efforts to collect on the loans resulting in one debtor to file an adversary proceeding. 

Navient lost the motion for summary judgment when it was determined that the loans we’re not exempt from discharge under the bankruptcy law. 11 U.S.C. § 523(a)(8)

Section 11, U.S.C. § 523(a)(8)(A)(ii) of the Bankruptcy Code specifies: 

(8)unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—

(A)

(i)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

(ii)an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

Part of the court’s decision was that a discharge should be interpreted in favor of the debtor. The section “obligation to repay funds received by an educational benefit” should not be interpreted to apply to private student loans. And that “educational benefit” language is more like the terms scholarship and stipend, which “signify granting, not borrowing.”

If you have questions about how your student loans could be affected by bankruptcy, contact a Fort Worth bankruptcy attorney.