Bankruptcy Court’s Pro-Consumer Decision On “Student Loan” By Joseph C. Smith, J.D.

Posted on 09/14/2016 at 11:36 am by Viewed 718 times

Earlier this year, the Bankruptcy Court of the Eastern District of New York ruled that a “bar loan” of $15,000 was dischargeable in bankruptcy. The Court ruled that the loan, taken out by a law student to cover living expenses while studying for the bar exam, did not provide an “educational benefit” but was instead an “arms-length consumer transaction.” This is a pro-consumer decision compared to other bankruptcy court decisions on student loans in the recent past.

Generally, student loans are difficult to discharge in bankruptcy. To do so, a debtor must show that repayment would cause an “undue hardship” on the debtor and the debtor’s dependents. Over time, bankruptcy courts increasingly harsh interpretation of this language has made it very difficult for debtors to prove that repayment would cause an “undue hardship.” Furthermore, bankruptcy courts have been widening the umbrella under which they consider any loan to be a “student loan.” This means that consumer loans, traditionally discharged in bankruptcy with little restriction, may require a showing of “undue hardship” to be eligible for discharge if they merely relate in some way to education. This has been implemented broadly by many bankruptcy courts to include loans for living expenses while studying for a professional exam. However, Judge Carla E. Craig’s decision in the matter of In re Campbell, discharged a debtor’s bar loan of $15,000, reasoning that the bar loan was an “arm’s length consumer credit transaction” and not a loan for an “educational benefit.” Therefore, the debtor was not required to show that repayment of the loan would cause an undue hardship for the loan to be discharged in the debtor’s chapter 7 bankruptcy.

While Judge Craig’s decision provided some relief for that debtor, it highlights the difficulty many debtor’s face when dealing with the substantial burden of student loan debt. Traditional student loan debt remains very difficult to discharge in bankruptcy. However, there are many advantageous repayment plans that adjust to a borrower’s income, providing affordable monthly payments. But these plans also have drawbacks to consider, including negative amortization and potential tax consequences. Making matters even more tenuous is how loan consolidation can affect a borrower’s eligibility for some of the most beneficial repayment plans.

Molleur Law Office is committed to helping clients plan and manage each stage of their student loan debt. If you or someone you know is having difficulty repaying student loan obligations, please contact our office for a consultation. You may have more options than you realize. If you are in the beginning stages of financing your education, Molleur Law Office can also help you understand the difference between various student aid options and which might be best for your circumstances.

Read the entire opinion here: http://www.nyeb.uscourts.gov/sites/nyeb/files/opinions/opinion_cec_16-03-24.pdf

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