Student Loan Debt and Bankruptcy

In an opinion by the Chief United States Bankruptcy Judge Carla E. Craig, the United States Bankruptcy Court for the Eastern District of New York ruled that a loan taken out by a law student to study for the bar exam was not within the broad category of student loans ineligible for a bankruptcy discharge.

Read the full opinion: here.

Bankruptcy Code section 523(a)(8) excludes as “non-dischargeable” (among other exclusions), any debt for “(i) an educational …loan made, insured, or guaranteed by a governmental unit [or] (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend.”  The Court in this case (Campbell v. Citibank, AP 15-01038 (cec)) determined that a loan to cover costs associated with the debtor’s bar examination study was not an “educational benefit” under the section quoted above and was thus dischargeable.

While this may be construed as a relatively specific and limited holding (and one that has no precedential value outside of this particular court), to many practitioners, it should signify a chipping away of the very broad and encompassing rule that educational loans are, by and large, not discharged in a bankruptcy.

Many consider the student loan debt crisis to be an possible economic “bubble,” in that trillions of dollars of such debt remains outstanding and subject to default. Low interest rates that have persisted since the Great Recession have likely kept such default risk at bay in many cases.  However, with an ever-increasing cost of education, the risk remains that student loan debt, especially in a hypothetical higher-interest-rate environment, could have significant macro-economic effects due to the amount of such debt outstanding and the increasing default risk as the monthly burden of such loans increases as a share of debtors income.

While student loans remains one type of debt that is generally non-dischargeable, this area of bankruptcy law is evolving and has received a due amount of national attention.  As graduates continue to enter an improved but somewhat unstable jobs market, the manner in which student loan debt is handled in bankruptcy will continue to be of significant importance.