Crocker Case Cracks Notion that Private Student Loans Can’t Be Discharged in Bankruptcy

Crocker Case Cracks Notion That Private Student Loans Can’t Be Discharged in Bankruptcy

Photo above by James Wheeler from Pexels.  

(The horrible pun above the photo is the author’s, 

and is not the fault of James Wheeler.)

Even people who know nothing about bankruptcy know that student loans are almost impossible to discharge in bankruptcy. 

This is unfortunate, since bankruptcy is the system charged with giving individuals relief from crushing debt and granting them a fresh start.  The national student loan debt exceeds $1.5 trillion.  This affects young people, of course, but more than 3 million senior citizens in the U.S. also have student loans.  By any standard, this is an emerging crisis, and it has become a major issue in the 2020 presidential campaign.  To this point, bankruptcy has provided very little relief to individuals struggling with student loan debt. 

The Fifth Circuit Court of Appeals is a federal court covering Louisiana, Mississippi and Texas.  In the hierarchy of United States Courts, it sits just one rung below the U.S. Supreme Court.  Two individuals, Evan Brian Crocker and Michael Shahbazi, wanted to form a class action against a private student loan servicer, Navient.  Both had received bankruptcy discharges and included Navient in their list of creditors.  Mr. Crocker got a $15,000 loan to fund his bar examination preparation; Mr. Shahbazi borrowed $11,658.99 for tuition and expenses while attending a technical school.  After discharge Navient continued to contact each of them, demanding payment.  Mr. Crocker and Mr. Shahbazi argued that Navient’s actions violated their bankruptcy discharge.  Navient answered that its claim was a student loan and the discharge did not apply.  In a decision issued October 22, 2019, the Fifth Circuit did not allow the class action to go forward, but ruled that private student loans of the type held by Navient are able to be discharged in bankruptcy. 

Let’s back up and understand how the Bankruptcy Code deals with student loan debt.  A discharge in bankruptcy will wipe out most debts, with obvious exceptions for things like child support, most taxes, fraud and the like.  The complete list of 19 items is found at Section 523(a) of the Bankruptcy Code.  Eighth on the list are student loans, but you have probably guessed there is a lengthy and legalistic definition of “student loans.”  The section begins by saying student loans of the kind listed will not be discharged unless doing so “would impose an undue hardship on the debtor and the debtor’s dependents.”  That sounds promising, but the undue hardship standard has been interpreted so strictly that it’s impossible for most people to make the required showing.  The Crocker case looked at the three categories listed in the statute as nondischargeable:

• Category One: “an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under ay program funded in whole or in part by a governmental unit or nonprofit institution.”  In short, if your student loan was guaranteed or connected to a governmental unit (such as the U.S. Department of Education), or a nonprofit organization, it presumably cannot be discharged.  This makes a certain amount of public policy sense, because repaying a government-backed student loan ensures funding will be available for future students. 
• Category Two: “an obligation to repay funds received as an educational benefit, scholarship or stipend.”  Uh-oh.  That sounds like it would cover just about anything, doesn’t it?!  But does it really mean what it seems to mean?  If so, why put so much care and effort into specifically defining the other two categories?  And note that the word “loan” is absent here.  We’ll come back to these points later. 
• Category Three: “any other educational loan that is a qualified education loan, as defined in [Section 221(d)(1) of the Internal Revenue Code.]”  That’s pretty clear: If the IRS considers it a “qualified education loan,” it's not dischargeable in bankruptcy. 

Navient agreed that the money it loaned was not made or guaranteed by a governmental unit, and was not a “qualified education loan.”  Navient argued that the second category applied and included loans.  Yet, as noted above, the word “loan” is suspiciously absent from Category Two, but is used in the other two categories.  Remember, courts have to apply the law as written by Congress and start from the assumption that the legislature means what it says, unless construing the wording literally would produce an absurd result. 

In Category Two, the word “loan” is substituted for “obligation to repay” and then includes three examples: educational benefit, scholarship or stipend.  The Fifth Circuit remarked that scholarships and stipends often “signify granting, not borrowing,” and that they “may not need to be repaid.”  Read this way, Category Two only applies when an “obligation” exists to repay funds under a scholarship or stipend.  But what about “educational benefit”?  The Fifth Circuit reasoned that since every word in a statute should be given meaning if possible, this term could not be read broadly as “a catchall for loans and most everything else financially benefitting a student.”  If that were the case, the Fifth Circuit reasoned: “Congress could have just exempted from discharge any ‘obligation to repay funds received as an educational benefit’ and left it at that.” 

The Fifth Circuit concluded its decision by examining legislative history and found no support for the proposition that all private student loans are nondischargeable.  The Fifth Circuit’s Crocker case won’t help those with government student loans or qualified education loans.  It does chip away at the argument that all private student loans automatically enjoy the same nondischargeable status.  If you have filed a bankruptcy case, or are considering one, be sure to discuss the origins of your student loan debt with your attorney so that he or she can consider whether an argument like the one in Crocker might apply to student loan debt in your case. 

The 7thirteen is a blog written by Jeff Narmore, focusing on consumer bankruptcy issues.  Visit my website at narmorelawoffice.com.

Narmore Law Office LLC is a debt relief agency and helps people file for relief under the Bankruptcy Code.