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Update Federal Court Holds Private Student Loans Dischargeable In Bankruptcy

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Another US federal court has recently agreed that private student loans ARE potentially dischargeable in personal bankruptcies. See In re McDaniel, Case No. 18-1445 (US 10th Cir. August 31, 2020). The case is notable for that reason alone, but it also provides an interesting lesson with respect to what debtors can expect when they file a Chapter 13 bankruptcy. Under Chapter 13, debtors are embarking on a process of reorganizing their debt and paying some of the debt via a multi-year payment plan. This is distinct from a Chapter 7 personal bankruptcy where debtors are attempting to "zero-out" their eligible debts without a payment plan. Not all debtors are qualified to file for Chapter 7, so it is important to consult with experienced bankruptcy and debt relief attorneys like those at Guardian Litigation Group to determine your eligibility for full discharge or to receive assistance in structuring your Chapter 13 plan.

The McDaniel case involved debtors living in Colorado named Byron and Laura McDaniel. The McDaniels filed a joint-debtor bankruptcy petition in 2009. Among their debts, they had 11 student loan accounts with Sallie Mae -- now known as Navient Solutions, LLC -- totaling about $200,000. The McDaniels filed under Chapter 13, which, as noted above, required them to prepare a payment plan for their debts. The plan submitted by the McDaniels was eventually confirmed by the bankruptcy court in 2010 and they successfully completed the five-year payment schedule. Their payment plan included payments on all of their student loans. Over the five years, the McDaniels paid about $27,000 in principal towards their Navient student loans. In 2015, they received a discharge from the bankruptcy court. After their discharge, Navient claimed that payments on the student loans were still owed and the McDaniels continued to make payments.

However, in June 2017, the McDaniels returned to the bankruptcy court and asked to have their bankruptcy case reopened. This was allowed by the bankruptcy judge and the McDaniels filed papers with the court asking the judge to declare that six of the eleven Navient student loans were "private student loans." These six loans were designated as the "Tuition Answer Loans." The McDaniels also asked the court to declare that the Tuition Answer Loans had been discharged under the 2010 Chapter 13 payment plan. Finally, the McDaniels sought a finding from the judge that Navient had violated various federal laws in trying to collect payments with respect to the Tuition Answer Loans after 2015.

In response, Navient basically argued that private student loans are still "student loans" and that, generally, student loans are not dischargeable in bankruptcy. Based on complicated and persuasive legal reasoning, the bankruptcy court disagreed and stated that the Bankruptcy Code treated standard student loans differently from private student loans. Standard student loans are generally not dischargeable, while private student loans are. On appeal, the Tenth Circuit Court of Appeals agreed. In doing so, the Tenth Circuit joined the Fifth Circuit in holding that private student loans are dischargeable. See Crocker v. Navient Solutions, LLC, 941 F.3d 206 (5th Cir. 2019).

This decision by the Tenth Circuit is not the end of the case for the McDaniels. The case has been returned to the bankruptcy court where the judge will make a determination whether the Tuition Answer Loans were typical student loans or were private student loans.

While it is legally complicated, generally, a private student loan can be defined as:

  • An education loan NOT funded or guaranteed by a government or a nonprofit agency OR
  • If funded/guaranteed by a governmental unit or nonprofit agency, the loan was not a "qualified educational loan" which is a loan that is NOT made to an "eligible student" or NOT used to pay "qualified education expenses" or NOT used to pay for attendance at an "eligible education institution"

In the end, Navient might still win. But the Tenth Circuit has rejected Navient’s broad claim that all private student loans are non-dischargeable.

The McDaniel case is good news for those living here in Irvine with crushing student loan debt. Even though we live in a state covered by the Ninth Circuit Court of Appeals, the McDaniel and Crocker decisions offer reasons to be hopeful. The Ninth Circuit has not yet ruled on this particular issue, but McDaniel and Crocker are both well-reasoned and persuasive. Circuit Courts often follow the lead of their fellow courts and, now, with two Circuits weighing in favor of dischargeability of private student loans, the Ninth Circuit might not be too far behind.

Contact an Experienced Debt Relief and Debtor Rights Attorney

For more information, contact the Debtor's Rights attorneys at Guardian Litigation Group. We have the tools and experience you need. Our Mission is to provide unparalleled legal services and support to financially distressed individuals. We can be reached via our contact page or by phone.