An appeals court has sided with borrowers who sought to discharge private student loans after filing for bankruptcy, a win for consumers trying to cancel their shares of roughly $50 billion in private educational debt, WSJ Pro Bankruptcy reported. Monday’s ruling by the U.S. Court of Appeals for the Tenth Circuit centers on a couple, Byron and Laura McDaniel, who sought chapter 13 bankruptcy relief in Denver for debts including about $200,000 of student loans owed to private lender Navient Solutions LLC. Unlike other types of personal debt, most types of student loans are nearly impossible to discharge even in bankruptcy, including government-backed loans. But the appellate court said the type of private loan issued by Navient — which didn’t meet the Tax Code’s definition of a qualified student loan — doesn’t enjoy the same protections against cancellation. The McDaniels’ debts can be discharged without the borrowers showing “undue hardship,” the high bar that must be cleared before bankruptcy courts will forgive most types of student loans, according to the ruling. The ruling rejected Navient’s claim that the McDaniels’ roughly $200,000 in student loans constituted “an obligation to repay funds received as an educational benefit,” a designation that would have protected the debt from being wiped out in bankruptcy. Pamela Foohey, a professor at Indiana University’s Maurer School of Law, said the decision represents one way that courts “can chip away at the lore that all student loans are effectively not dischargeable.” The ruling applies to borrowers of private student loans that aren’t deemed “qualified” under Internal Revenue Service regulations. To be qualified, student loans must be issued to borrowers who attend certain accredited schools, must not exceed the cost of attendance and cannot be for students taking less than six credits a semester.
