Crocker then added as a co-plaintiff Michael Shahbazi (who had filed Chapter 7 in Virginia in 2011 with a loan related to his attendance at a technical school in 2002), and sought certification as a national class action.  Navient moved for summary judgment, claiming the District Court lacked jurisdiction to enforce a discharge entered in another District. 

The District Court certified both the dischargability and jurisdiction question to the Circuit Court.  The Fifth Circuit, in a major holding outside the scope of this blog post, held that only the Court that issued a discharge order has the power to hear an action for violation of that order.

As to the dischargeability question, the Circuit Court held that the § 523(a)(8) student loan exception to dischargeability did not apply to the bar study loan, and that it was indeed dischargeable.   This is a position that this office has long held, and successfully represented clients with respect to. 

§ 523(a)(8) says that absent “undue hardship,” the bankruptcy discharge does not apply to: “qualified educational loans” (§ 523(a)(8)(B)), education debts made, insured, or guaranteed by the government (§ 523(a)(8)(A)(i)), and obligations “to repay funds received as an educational benefit, scholarship, or stipend” (§ 523(a)(8)(A)(ii)).

With respect to bar study loans, such borrowers have already graduated from law school at the time of borrowing, and bar prep classes are not Title IV institutions, so such loans can’t be qualified educational loans under § 523(a)(8)(B).  Moreover, since bar prep schools are not qualified to participate in Title IV programs, therefore all such loans are private (i.e. not governmental).  That takes care of § 523(a)(8)(A)(i).  Nor are the funds received as a scholarship or stipend.  So that leaves you, as will all bar study loan cases, with the definition of “educational benefit.”

After looking at the legislative history and doing linguistic analysis, the Court concluded: “[E]ducational benefit” is limited to conditional payments with similarities to scholarships and stipends. The loans at issue here, though obtained in order to pay expenses of education, do not qualify as “an obligation to repay funds received as an educational benefit, scholarship, or stipend” because their repayment was unconditional.”

This is a good decision that does not fall into the trap that has snared other courts of confusing an “educational benefit” with “the benefit of an education.”  Debtor’s lawyers should take note.

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