Bankruptcy, Student Loans

Broke Law Grad Gets Bar-Study Loan Discharged In Bankruptcy

Thanks to this judge, there's now a chance you could shed your bar-exam loans in bankruptcy.

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student-loan-debtLaw school graduates who are down on their luck are all too familiar with the fact that their crushing student loan debt obligations are nondischargeable in bankruptcy, but they’ll likely be heartened when they find out they may now be able to shed their bar-prep loans in some bankruptcy courts.

Late last week, Bankruptcy Judge Carla Craig of the Eastern District of New York ruled that bar-exam-related loan debt isn’t in the same category as student loan debt, instead holding that it’s “a product of an arm’s-length agreement on commercial terms.” Judge Craig made this ruling in the case of Lesley Campbell, a 2009 Pace University School of Law graduate with approximately $300,000 in debt who’d failed the bar exam and filed for bankruptcy in 2014. Campbell asked the court to discharge the unpaid portion of a $15,000 Citibank loan that she took out when studying for the bar.

The Wall Street Journal (sub. req.) has some additional information on Campbell’s case:

The decision, which is the most thorough recent ruling on the matter, contradicts the widely accepted notion that student-loan-related debt can only be canceled in bankruptcy under rare cases of extreme financial hardship. …

“We’re starting to chip away at the absolute immunity of student loans from bankruptcy,” said Austin Smith, Ms. Campbell’s lawyer.

A lawyer for Citibank, a unit of Citigroup Inc., declined to comment on the ruling or say whether the bank plans to appeal.

Judge Craig’s ruling isn’t binding on other courts but may help other bankruptcy judges with similar disputes before them.

This isn’t the first time a bankruptcy court has grappled with bar-study loans, but it’s one of the first times there has been a positive result for a law school graduate seeking cancellation of this type of debt. For example, in April 2010, Bankruptcy Judge Jack Caddell of the Northern District of Alabama ruled that Troy Skipworth, a graduate of the University of Alabama School of Law, couldn’t cancel a $9,475 bar-study loan because he was unable to sufficiently establish the elements of the undue hardship test; the court further found that Skipworth’s bar-exam loan was an “educational benefit.” In addition to the Skipworth case, in October 2015, Bankruptcy Judge Christopher Latham of the Southern District of California ruled that Pamela Brown, a law school graduate, couldn’t cancel a $15,000 bar-study loan — not because she failed to establish her undue hardship claims (she didn’t even allege undue hardship), but because she failed to prove that the loan wasn’t an educational loan under 11 U.S.C. § 523(a)(8).

Judge Craig indicated during a hearing in the Campbell case that she did not believe these types of loans fell under the “educational benefit” category of Section 523, and that she “respectfully disagree[d]” with the case law holding that such bar-exam loans were to be considered nondischargeable in bankruptcy:

I also don’t think the word “educational benefit” would be normally understood to include a loan. A loan, unless it’s — I suppose if it were at a zero interest rate loan, or something like that, might be considered a benefit. But a loan is a commercial transaction, it’s not a benefit.

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In her ruling in Campbell’s case, Judge Craig doubled down on her assault against the “educational benefit” language relied upon by bar-study loan lenders (citations omitted):

Some courts have decided without explanation, or assumed, that “educational benefit,” as used in § 523(a)(8)(A)(ii), encompasses any loan which relates in some way to education. This broad interpretation of the exception to discharge in § 523(a)(8)(A)(ii) would render superfluous most of the other provisions of § 523(a)(8). If the term “educational benefit” includes any student loan, there would be no need to specifically identify, as Congress did in § 523(a)(8)(A)(i) and § 523(a)(8)(B), particular loans, extended by particular lenders, which are excepted from discharge, since § 523(a)(8)(A)(ii), if interpreted to extend to all education-related loans, would swallow both provisions. The cases which have failed to address this issue, including those relied upon by Defendants, are for this reason unpersuasive.

In reporting on this ruling, the Wall Street Journal spoke with John Rao of the National Consumer Law center, who said that in the past, bankruptcy judges had a “reflexive knee-jerk reaction that if [it looks] anything like a student loan, it’s nondischargeable.” Thankfully, Judges like Carla Craig are “starting to take a closer look.”

Lesley Campbell is now working as a document reviewer, and plans to take the bar exam again in February. While she still has to pay down the law school debt she accumulated while studying at Pace Law (she says she’s current on all payments), at least she doesn’t have to worry about paying off her bar-study loan anymore.

(Flip to the next page to see Judge Craig’s decision in the Campbell matter.)

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