Student borrowers with certain types of private loans inched closer to being able to discharge that debt in bankruptcy after a New York court ruling.
On Thursday, the U.S. Court of Appeals for the Second Circuit sided with student debtor Hilal Homaidan against student loan giant Navient (NAVI), which had argued that private student loans could not be erased under the existing bankruptcy laws.
A three-judge panel determined that certain private student loans can be discharged in certain cases through bankruptcy, just like credit cards and other debts, if certain conditions are met.
“Navient’s broad reading—under which any loan is nondischargeable under §523(a)(8)(A)(ii) if it was used to further one’s education—would draw virtually all student loans within the scope of § 523(a)(8)(A)(ii),” Circuit Judge Dennis Jacobs stated. “That construction proves too much.”
The ruling, along with similar rulings in the Fifth and Tenth Circuits, suggests that private loan servicers such as Navient will struggle to claim that all private student loans are non-dischargeable in bankruptcy.
“It sort of creates this domino effect… where you’ve got three court of appeals cases saying that this type of student loan can be discharged,” Jason Iuliano, associate professor of law at the University of Utah and an expert on student loan bankruptcy law, told Yahoo Finance. “You’re gonna get attorneys thinking more about this…. and really rethinking their categorical advice that they give everyone that student loans can’t be discharged.”