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10th Circuit Bankruptcy Judge Tyson Finds Private Educational Loans Are Not Automatically Nondischargeable


Courts are split on whether all educational loans are nondischargeable as an educational benefit.  Noting the “trending narrower view,” Bankruptcy Judge Kimberley H. Tyson (Denver, CO) ruled that: (1) not all educational loans are presumptively nondischargeable; and (2) an educational loan from a private lender is not automatically nondischargeable because it does not fit within one of the categories in Section 508(a)(8)(A) or (B).[1]

In addition to concededly nondischargeable, federally guaranteed student loans, the Debtors, a couple, had amassed almost $110,000 in educational loans from a private lender, which amount had grown to almost $250,000 with interest.

The Debtors confirmed a Chapter 13 plan providing that the student loans would be treated as unsecured claims or “deferred until the end of the plan.” During the Chapter 13 case, the Debtors paid almost $27,000 on the private loans.

After discharge, the lender contended that the loans were nondischargeable and continued collection activities, which resulted in the Debtors paying an additional $37,500 toward their private loans.

More than two years after discharge, the Debtors reopened their Chapter 13 case and filed an adversary proceeding against the lender seeking to hold the lender in contempt and for a declaration that their private loans were discharged.

In a failed Motion to Dismiss, the lender argued, in part, that the Debtors’ private loans were a nondischargeable “obligation to repay funds received as an educational benefit, scholarship or stipend” pursuant to Section 523(a)(8)(A)(ii) of the Bankruptcy Code. The lender relied on subsection (A)(ii), because the loans were not qualified educational loans under subsection (B), nor were they made or guaranteed by the government or a nonprofit institution under subsection (A)(i).

Regarding subsection (A)(ii), Judge Tyson noted that the bankruptcy courts are divided, with some courts holding that private loans qualify as an “educational benefit,” and, therefore, are nondischargeable.

Siding with the Debtors, Judge Tyson based her opinion on the absence of the word “loan” in subsection (A)(ii), nothing that the word “loan” does appear in subsections (B) and (A)(i). Judge Tyson said that the statutory language — “an obligation to repay funds received as an educational benefit, scholarship or stipend”— “does not include a loan.” Judge Tyson also attached significance to the word “as,” which she called a “qualifier” denoting “how the funds were received.” In In re McDaniel, the funds were received as a loan, not as an educational benefit, scholarship or stipend, if subsection (A)(ii) included loans, Judge Tyson reasoned then the other subsections would be superfluous because the categories covered by the other subsections would be subsumed within subsection (A)(ii).

The lender also argued that there is no private right of action for a discharge violation. Judge Tyson rejected this argument, saying that the court’s equitable powers under Section 105(a) allow the court to remedy violations of substantive provisions of the Bankruptcy Code.

Certainly, Judge Tyson is blazing new trails in this increasingly important debate concerning the dischargeability of private student loans.

[1] McDaniel v. Navient Solutions LLC (In re McDaniel), 17-01274 (Bankr. D. Colo. Sept. 24, 2018)

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