An Appeals Court Allowed Private Student Loans to Be Discharged in Bankruptcy – This Could Change the Tide

By Rachel Puryear

If you have student loans, or you read this blog regularly, you know that for many years now, struggling student loan borrowers have faced a very uphill battle to try to discharge their student debts in bankruptcy proceedings. However, a recent ruling from a New York-based federal appeals court could soon put a nail in that coffin.

Man using bolt cutters to free himself from a shackle labelled “debt”.

In short, a particular provision of bankruptcy law prohibiting discharge of “an obligation to repay funds received as an educational benefit” has been interpreted by courts in the past to mean that student loans generally cannot be discharged in bankruptcy.

However, this decision saw that provision differently – and as applying much more narrowly to certain grants, but not necessarily to student loans.

Therefore, this decision said that private student loans in fact can be discharged in bankruptcy. This could open the door to more distressed student borrowers pursuing such.

However, it’s not so simple as ‘this ruling changes the law everywhere’. Appellate courts in different parts of the country can and do rule differently on some of the same matters, even though they can also be influenced by previous decisions of lateral courts. And a future decision by the Supreme Court – going either way – could later affirm or overrule an appellate court decision.

Nonetheless, this gives some hope to distressed student borrowers.

In any event, bankruptcy is necessary for some, but is far from an ideal option for anyone. It comes with a lot of financial and even employment consequences for several years, and should never be approached lightly. On the one hand, allowing all student borrowers in distress the option of bankruptcy would be a huge victory, and would simply be just. On the other hand, given the consequences of bankruptcy, more options are needed for student borrowers – such as debt cancellation, reduction of interest on student loans, and better options for loan forgiveness.

Thank you, dear readers, for reading, following, and sharing. Here’s to your prospering on your terms, so you can do more of what you love, with those you love.

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