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Appeals Court Rules Private Loans Dischargeable in Bankruptcy

July 16, 2021

The U.S. Court of Appeals for the Second Circuit ruled Thursday that private student loans are dischargeable in bankruptcy.

The case involves loans taken out by Hilal K. Homaidan, a former Emerson College student, from Sallie Mae and a successor corporation, Navient.

Navient maintained that a section of the bankruptcy code that exempts from discharge “obligation[s] to repay funds received as an educational benefit, scholarship, or stipend” prevented discharge of the loans. The court found otherwise.

“Under Navient’s reading of that provision, the term ‘educational benefit’ would encompass virtually all private student loans,” the court found. “But that reading cannot be reconciled with the text and structure” of the provision, which, the court found, “excepts from discharge a far narrower category of debt.”

The Wall Street Journal reported the ruling is the third such ruling to open up some private loans to discharge through bankruptcy.

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