Most student loans are nondischargeable under the bankruptcy code because they are insured by the government. But, what about private loans taken in the pursuit of higher education? Particularly those taken in pursuit of degrees beyond a bachelor level.
U.S. bankruptcy code states that among the obligations that can’t be cancelled include funds received as an “educational benefit”. However, a recent ruling in New York discharged at least some of a loan taken out by an individual to attend law school.
The case involved a debtor seeking to have her loan through a major lender cancelled stating that the money borrowed was not an ‘educational benefit’ under U.S. bankruptcy code, which the lender vehemently debated.
The New York judge’s decision to cancel part of the debt stated that …”the fact that lenders underwriting standards required the borrower to be a law student does not turn an arm’s length consumer credit transaction into a ‘benefit’ within the meaning of the bankruptcy code.”
Although judges have often ruled the opposite way in similar cases, this recent decision may affect future bankruptcy cases involving private loans taken for higher education.
Source: ABC News, “Judge’s Ruling on Law School Grad’s Debt Could Signal ‘Seismic’ Shift in Loan Practices”, by SUSANNA KIM, March 28, 2016.
