Disagreeing with several other lower courts, two bankruptcy judges from the Eastern District of New York held within the last month that some types of education loans are not excepted from discharge as an “educational benefit” under Section 523(a)(8)(A)(ii).
The first case, decided on March 24 by Chief Bankruptcy Judge Carla E. Craig of Brooklyn, N.Y., held that a bar loan is an ordinary consumer loan, not an “educational benefit” that would be nondischargeable.
In her case, a student in law school got a $15,000 bar loan in 2009 from a commercial lender. She paid the loan until 2012 and filed a chapter 7 petition in 2014. After receiving a discharge, she sued the lender, seeking a declaration that the loan was discharged. The lender filed a motion to dismiss and lost.
The loan would not have been nondischargeable under Section 523(a)(8)(A)(i) because it was neither guaranteed by the government nor made by a nonprofit institution. Consequently, the lender contended that the loan was an “educational benefit” excepted from discharge under subsection (a)(8)(A)(ii).
Judge Craig said that some courts have held that an “educational benefit” includes “any loan which relates in some way to education.” She said such a “broad interpretation” would “render superfluous most of the other provisions in Section 523(a)(8).”
“Educational benefit,” she said, must be read in tandem with “scholarship or stipend,” the other descriptive words in the subsection, and that those words must refer to “something other than a loan.” In her view, subsection (a)(8)(A)(ii) refers to “types of conditional grants.”
Judge Craig disagreed with bankruptcy courts elsewhere that explicitly hold that bar loans are nondischargeable. She also disagreed with those courts holding that 2005 amendments to the subsection no longer limit nondischargeability to loans made or guaranteed by “governmental units or non-profits.”
Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., agreed with Judge Craig’s analysis in his opinion on April 4. Judge Grossman’s case involved a woman with $160,000 in loans incurred to secure a “degree” from an unaccredited, unlicensed foreign medical school. He held that the loan was dischargeable because it did not fall within the exception to discharge under subsection (a)(8)(A)(ii).
Judge Grossman read the statute to mean that an “educational benefit” excepted from discharge in the subsection “refer[s] to educational debts other than loans.” He said that the subsection “is not a ‘catch-all’ provision designed to encompass any educational claim arising out of any transaction that bestows an educational benefit on a debtor.”
The loan in Judge Grossman’s case did not fall within any of the other categories that would render the debt nondischargeable because the loan was not a “qualified education loan,” nor was it made or guaranteed by the government or a nonprofit institution.
Because she held that a bar loan is not an “educational benefit,” Judge Craig did not go so far as other courts by holding that obligations under subsection (ii) must meet one of the requirements in subsection (i).