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Law students know the refrain all too well: you can't discharge your law school loans. But a recent ruling out of New York Bankruptcy court suggests that at least some bar related debts might be discharged successfully in a Chapter 7. Is that a ray of light on on the horizon?
Actually, now that we mention law school loans, this would be an excellent time to refer readers to our earlier piece on student debt forgiveness.
Not an "Educational Benefit"
Bankruptcy, as law students know, is the strict purview of federal law. The U.S. bankruptcy code ("the code") declares that certain debt obligations cannot be discharged, among these being funds received as an "educational benefit," scholarship, or stipend.
This was the critical point of contest in the case of Lesley Campbell of New York. Campbell applied for a $15,000 loan from Citibank while she was a student at Pace Law School in 2009. Citibank issued her the loan and she continued to pay off in increments. But she failed the bar exam in November of 2014, she filed for Chapter 7 protection.
Campbell moved to have the debt canceled (or discharged) because it did not constitute an "educational benefit" as envisioned under the code. Citibank says it was. In fact, said Citibank, her being a law student (sounds like education, right?) was a necessary condition of her being eligible for the loan.
But Judge Carla Craig of Brooklyn's Bankruptcy Court decided to side with Campbell. Under Citibank's line of reasoning, private lenders could also advance the same argument against debtors taking educational or training courses, Judge Craig said. So far, these debts are dischargeable.
In the view of Judge Craig, a bank's underwriting standards requiring law student status do not turn an "arm's length" consumer credit transaction into an "educational benefit" for purposes of bankruptcy discharge exemption.
More Discharges are Sure to Come; Fewer Loans as Well
The decision is contrast to an earlier case out of Alabama where the bankruptcy court judge there did not allow a law student there to discharge a $10,000 bar-study loan.
Businesses hate uncertainty and these conflicting opinions make things very uncertain, indeed. Campbell's lawyer, William Brewer III described the court's decision in favor of his client as "seismic." He described it as flipping the script for thousands of people like Campbell who have fallen victim to predatory loan practices by private lenders.
Just as seismic may be the number of persons who now apply for chapter 7 discharge of their bar-study loans possibly drowned out by the even more seismic sucking noise of lenders refusing to lend money to study for the bar.