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State Bar of Michigan
United States District Court - Eastern District of Michigan
U.S. Court of Appeals - Sixth Circuit

Student Loans Made by Private Lenders Can Be Discharged in Bankruptcy

For years and years, the standard refrain by bankruptcy practitioners to their clients has always been the same when it comes to student loans - they cannot be discharged in bankruptcy unless the debtor proves that it is an “undue hardship” for him or her to have to repay the student loan.

Establishing that a student loan is creating an “undue hardship” for the debtor is such an impossibly high threshold that it almost never works and the overwhelming majority of debtors remain liable on their student loans once the bankruptcy is over.

In a recent decision, McDaniel v. Navient Solutions, LLC, No. 18-1445 (10th Cir. Aug. 31, 2020), the Tenth Circuit Court Of Appeals concluded that if the student loan was made by a private lender, and the loan was not guaranteed or insured by a governmental agency, than it can be discharged in bankruptcy. This decision applies for both Chapter 7 and Chapter 13 bankruptcies. The most important aspect of the McDaniel decision is that whether the student loan created an undue hardship for the debtor is irrelevant as to whether the student loan can be discharged.

In reaching their decision, the McDaniel Court analyzed the bankruptcy code sections that made student loans non-dischargeable, 11 USC 523(a)(8)(i) and (ii).

11 USC 523(a)(8)(i) mandates that an “educational benefit” or “loan” made, insured or guaranteed by a governmental unit is non-dischargeable. The McDaniel Court read this to mean that an “educational benefit” is something separate and distinct from a “loan”. In other words, an “educational benefit” is not the same as a “loan”. However, under this section, even though an education benefit and a loan are separate and distinct, neither can be discharged if they were insured or guaranteed by a governmental unit. Also, there is no distinction between types of governmental units. Any type of governmental agency that either insures or guarantees the educational benefit or loan renders the educational benefit or loan non-dischargeable.

11 USC 523(a)(8)(ii), on the other hand, makes non-dischargeable an obligation to repay funds received as an educational benefit, scholarship or stipend. This section does NOT include the word loan in it, which means that a loan (as opposed to an educational benefit, scholarship or stipend) is not made non-dischargeable by this section. Also, this section is silent as to insurers or guarantors. Since this section does not include the word loan in it , and since it is silent as to insurers and guarantors, the ultimate conclusion reached by the McDaniel Court was that a student loan not made, insured or guaranteed by a governmental agency ( in other words, a loan made by a private lender) is dischargeable in bankruptcy.

Please contact the Law Offices of Joseph L. Grima & Associates P.C. at (313) 417-8422 so that we can explain how this important legal development may allow you to discharge your student loans.

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