An important recent decision in the Second Circuit (the federal appellate court comprising the judicial districts within New York, Connecticut and Vermont) took up the important issue of a bankruptcy debtor’s ability to discharge private (non-governmental, for-profit) student loans.
A major benefit to filing a bankruptcy is the discharge. A discharge is a court-ordered release of personal liability on a debt or debts. The Bankruptcy Code provides a broad discharge for scheduled debts, however there are a number of exceptions to the discharges provided for by chapter 7 and 13 of the Code. Due to the ever-increasing debt burden caused by skyrocketing educational costs, student loans are an important issue in many insolvency cases. Student loans are a type of debt generally ineligible for a bankruptcy discharge, absent an undue hardship.
The Case, In re: Hilal K. Homaidan
In the Second Circuit case, In Re: Hilal K. Homaidan, the Court held that private students loans do not enjoy the same broad discharge exemption afforded to governmental and non-profit student loan creditors. Only one portion of the bankruptcy student-loan exception applies to private student loans: loans made to individuals for eligible schools and for certain qualified expenses.
While private student-loan debt still maintains a preferential status under the Bankruptcy Code versus–for example–credit card debt, Homaidan provides an important limitation of the student-loan discharge exception related to private student loans.
In re: Hilal K. Homaidan