An appeals court ruled that private student loans can be discharged through bankruptcy like other consumer debts, opening the door for more borrowers to obtain relief from educational debt, WSJ Pro Bankruptcy reported. Thursday’s ruling by the U.S. Court of Appeals for the Second Circuit sided with Hilal Homaidan, an Emerson College alumnus who sought to eliminate through bankruptcy the $12,567 in private student loans he took on to finance his education. Government-backed student loans are nearly impossible to erase in bankruptcy. To qualify, borrowers must show that continuing to repay would impose an “undue hardship,” a standard so high that few even attempt to meet it. Homaidan’s lender, Navient Solutions LLC, argued that his private loans should be treated the same way. But the Second Circuit said that certain types of private educational loans, especially those that don’t meet the tax code’s definition of a qualified student loan, can be canceled through the bankruptcy process without a showing of undue hardship. There is about $50 billion of outstanding student debt in this category, according to Homaidan’s lawyers. He filed for chapter 7 bankruptcy soon after graduating from Emerson in 2007 and received a discharge of his debt in bankruptcy court. But the discharge order was unclear on whether the Navient loans had been eliminated. Navient hired a collection firm to pester Mr. Homaidan into repaying, causing him to believe that he still owed money on the loans, according to the appellate ruling. He paid Navient in full in the belief that he had a legal obligation to do so, according to the ruling.
