Private student loans can be tossed in bankruptcy, appeals court rules

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A New York-based federal appeals court on Thursday said that private student loans are not protected from discharge in bankruptcy.

, a three-judge panel of the 2nd U.S. Circuit Court of Appeals upheld U.S. Bankruptcy Judge Elizabeth Stong’s refusal to dismiss a lawsuit against student loan servicer Navient Solutions LLC accusing it of violating a prior court order discharging a borrower’s loans.

After graduating from Emerson College, the borrower, Hilal Homaidan, filed for Chapter 7 bankruptcy in New York and obtained a discharge in 2009 of his loans. But the discharge order was unclear about whether it applied to Homaidan's two private loans, which totaled $12,567, according to the decision. Navient, succeeding Sallie Mae as the loan servicer, sought repayment of them in any case.

In the decision, penned by Circuit Judge Dennis Jacobs and joined by Judges Denny Chin and William Nardini, the court agreed with the bankruptcy court’s finding that the language of the "educational benefit" provision is “an unconventional way to discuss a loan.” The court said that if Congress intended to protect all educational loans from discharge, “it would not have done so in such stilted terms.

 

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