March 29, 2016

In a recent decision from the Second Circuit, the Bankruptcy Court for the Eastern District of New York ruled that law school grads can discharge debt incurred while preparing for the bar exam.

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The case of in re Lesley Campbell involves a Pace University School of Law graduate, Lesley Campbell, who sought to discharge the unpaid portion of a $15,000 loan she took out from Citibank to study for the bar in 2009. After borrowing the money, Ms. Campbell failed the bar exam. This forced Ms. Campbell to take a secretarial job at a hotel-management company with an annual salary of $49,000. She made several payments under the terms of the loan, but was unable to fully satisfy the underlying debt. She filed for bankruptcy in 2014.

The Bankruptcy Court ruled that the loan was the “product of an arms-length agreement on commercial terms” and “is not an ‘educational benefit’ under [11] § 523(a)(8)(A)(ii).” Thus, the debt was dischargeable. The court reached the conclusion by dissecting the plain language of § 523(a)(8)(A)(ii) and the cases interpreting its language.

Unfortunately, the bar loan was a small portion of Ms. Campbell’s nearly $300,000 student loan debt. Nevertheless, the ruling comes in the wake of consumer-advocacy groups and some federal lawmakers who are pushing for grads to be able to use bankruptcy to get some relief. This case is viewed as a step-forward in that battle.

As a practice point, attorneys and judges should explore “student loans” that are masquerading as commercial debts and do not provide an “educational benefit” within the plain language of 11 USC 523. 

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