This Colorado couple got $200,000 of student loans forgiven in bankruptcy.
Here’s what you need to know—and what this could mean for your student loans.
A recent legal ruling could make it easier for you to discharge your student loans in bankruptcy. Laura Paige McDaniel and her husband Byron voluntarily filed for Chapter 13 bankruptcy after they could not pay off nearly $200,000 in student loans. McDaniel said she initially borrowed approximately $120,000 in student loan debt for college and graduate school. Navient, their loan servicer, argued that their private student loans could not be discharged in bankruptcy. The U.S. Court of Appeals For The 10th Circuit examined the following question with respect to the bankruptcy code: does an educational loan constitute “an obligation to repay funds received as an educational benefit?”
The U.S. Bankruptcy Code says that student loans cannot be discharged if they are:
- a loan made, insured or guaranteed by the government or funded by the government or a non-profit;
- an obligation to repay funds received as an education benefit, scholarship or stipend; or
- a qualified educational loan.
The In McDaniel vs. Navient Solutions, LLC, the 10th circuit ruled in a 45-page decision that an educational loan does not constitute an obligation to repay funds received as an education benefit. The Court held that McDaniel didn’t have to prove “undue hardship” because McDaniel used certain student loans known as “Tuition Answer Loans” to fund her living expenses while attending school. These student loans, according to the Court, did not constitute an “obligation to repay funds received as an education benefit.”
Cancel student loans
Generally, unlike mortgage or credit card debt, student loans cannot be discharged in bankruptcy. However, there are exceptions to this rule, particularly if a student loan borrower can prove undue financial hardship. The Brunner test is the legal test in all circuit courts, except the 8th circuit and 1st circuit. The Brunner test says:
- the borrower has extenuating circumstances creating a hardship;
- those circumstances are likely to continue for a term of the loan; and
- the borrower has made good faith attempts to repay the loan.
To discharge student loans through bankruptcy, an Adversary Proceeding (a lawsuit within bankruptcy court) must be filed, where a debtor claims that paying the student loan would create an undue hardship for the debtor.
What this means for your student loans
This ruling could have ripple effects with respect to student loans and bankruptcy:
- Cancel Student Loans: For example, the McDaniel decision may make it easier for you to discharge private student loans in bankruptcy.
- Private Student Loans: However, this doesn’t mean that all private student loans can be discharged in bankruptcy. For example, cancelling student loan debt may only apply in circumstances in which a private student loan exceeds the cost of attendance.
- Lenders Can Argue This: The case does not impact a student loan lender or student loan servicer’s ability to argue that a student loan is a qualified educational loan or was made by the government or non-profit and is therefore not dischargeable.
- Law Applies Here: Importantly, the McDaniel decision only applies to the 10th circuit, so it is not the governing law in other circuit courts. (The 10th Circuit includes Colorado, New Mexico, Oklahoma, Utah and Wyoming). However, other circuit courts can look to the 10th Circuit for instructive guidance for cases in their circuit.
- Federal Student Loans: The case does not impact public student loans (such as Stafford student loans or other federal student loan debt), which represent approximately $1.5 trillion of student loan debt in the U.S., or more than 90% of all outstanding student loan debt.
- Bankruptcy: It’s also important to understand that each bankruptcy case has unique facts and circumstances that may differ from your own. Therefore, you should not read this case as a free pass to have your student loans cancelled.
- Growing Trend?: Rather, this case may be part of a growing trend that may allow student loan borrowers to discharge certain private student loans in bankruptcy.
How to pay off student loans
Bankruptcy is not the only way to pay off student loans. It’s essential to understand all your options and to make the best decision for your financial circumstances. You can explore student loan refinancing, income-driven repayment and other student loan forgiveness too.
Will Trump cancel student loans?
Trump wants second stimulus checks in bigger stimulus package