Kaitlin E. Maloney
In a recent turn of events regarding the dischargeability of student loan debt, the United States Bankruptcy Court for the Eastern District of New York ruled that a law school graduate’s loan taken for the purpose of her studying for the bar exam was dischargeable in bankruptcy. In Campbell v. Citibank, Chief Judge Carla Craig distinguished bar loans from student loan debt that is nondischargeable absent “undue hardship,” and held that because bar loans are not considered an “educational benefit” under § 523(a)(8)(A)(ii) they are dischargeable.
Lesley Campbell, a 2009 graduate of Pace University School of Law, obtained a $15,000 bar loan from Citibank to finance her bar review course and living expenses while studying for the bar exam. After failing the bar exam, Campbell took an administrative position at a hotel management company and made payments on the bar loan until 2012. With nearly $300,000 in student loan debt, Campbell filed for Chapter 7 bankruptcy protection in 2014. Campbell then filed an adversary proceeding against Citibank, seeking a determination that the unpaid portion of the bar loan was dischargeable.
Specifically, Campbell argued that none of the exceptions to discharge set forth in § 523(a)(8) was applicable to the bar loan, making it dischargeable. That section states:
(a) A discharge under section 727. . . of this title does not discharge an individual debtor from any debt–
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—
(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend, or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual . . . .
Because the parties agreed that Campbell did not meet the statute’s demanding “undue hardship” standard and that the bar study loan was not excepted from § 523(a)(8)(A)(i) or § 523(a)(8)(B), Campbell’s sole basis for discharge depended on whether the bar loan was an “educational benefit” within the meaning of § 523(a)(8)(A)(ii), a term that is not defined in the Bankruptcy Code.
Other Bankruptcy Court decisions have defined “educational benefit” to mean “any loan which relates in some way to education.” Such “reflexive knee-jerk reaction” makes nondischargeable any loan that resembles a student loan in the slightest way. In Campbell, Citibank took a similar approach, urging that the bar loan was an “educational benefit” because Campbell’s eligibility in obtaining it depended on her being a law student. The court disagreed, however, and determined the bank’s underwriting standards “[did] not turn an arm’s-length consumer credit transaction into a ‘benefit’ within the meaning of § 523(a)(8)(A)(ii).”
In concluding that the bar study loan was a consumer credit transaction and not an “educational benefit,” the court relied on a traditional canon of statutory construction and the statute’s legislative history. The canon of noscitur a sociis instructs that “when a statute contains a list, each word in that list presumptively has a ‘similar’ meaning.” “Educational benefit” would thus have a similar meaning as “scholarship” and “stipend,” both of which the recipient does not have to repay. Accordingly, the court determined that “educational benefit” must be interpreted to mean something other than a consumer loan, especially because the word “loan” is used elsewhere in § 523(a)(8), but not specifically in § 523(a)(8)(A)(ii).
The legislative history and purpose of § 523(a)(8) further supported the conclusion that “educational benefit” should not be read to mean merely a consumer loan, such as the bar loan at issue in Campbell. Section 523(a)(8) was enacted “to safeguard the financial integrity of the education loan programs,” especially due to the unique nature of government-backed educational loans, which “are made without business considerations, without security, without cosigners, and rely for repayment solely on the debtor’s future increased income resulting from the education.”
Consumer loans offered though for-profit institutions, however, do not carry those same concerns. In fact, Campbell’s bar study loan application stated that it was a “consumer credit application” that would be “evaluated through a credit-scoring model.” In this regard, Campbell’s bar loan differed greatly from government-backed loans and other loans taken to obtain a degree. Because Campbell’s bar study loan was “a product of an arm’s-length agreement on commercial terms,” the court determined that it was not an “educational benefit” under § 523(a)(8)(A)(ii) and thus was dischargeable.
Campbell’s attorney described his client’s outcome as what many believe to be “a seismic development” for student loan dischargeability. As attorneys from the New York Bankruptcy Assistance Project, MFYY Legal Services, Inc., and the New York Legal Assistance Group argued in their amicus brief in support of Campbell, this case affects more than just those borrowing bar study loans. The overly broad interpretation of “educational benefit” offered by other courts “threatens to deny . . . many other debtors struggling with ineligible student loans, the fresh start to which they are entitled under the Bankruptcy Code.” After all, the primary purpose behind Chapter 7 bankruptcy protection is to protect individuals from being plagued indefinitely by their unfortunate financial positions. To this end, Campbell recognizes that such a broad interpretation of “educational benefit” would only add to the immense amount of student loan debt that debtors are unable to discharge.
Due to the uncertainty created by Campbell in how courts will assess the dischargeability of bar loans, some express concern that lenders will be hesitant to extend such loans for those studying for the bar exam. This is unlikely, however, because “the vast majority of people who get those loans get a law degree, pass the bar and don’t file for bankruptcy.” Bar loans are “low risk for the lender.” The student already has received her law degree and needs only to pass the bar exam in order to seek employment as a lawyer, so the potential adverse effects of the Campbell ruling are low.
The Campbell decision came down “amid increasing concerns raised by state and federal lawmakers in regard to the ballooning nationwide student debt,” and only a few months after the United States Supreme Court denied certiorari in Tetzlaff v. Educational Credit Management Corp. In doing so, the Supreme Court declined to answer which test is appropriate for determining “undue hardship” in discharging student loan debt under § 523(a)(8) —the flexible totality of the circumstances test, or the more demanding Brunner test. A law school graduate’s bar loan will also be dischargeable if repayment poses an “undue hardship,” but the hurdle under either test is incredibly high.
Only time will tell as to whether other bankruptcy courts will adopt the same approach taken in Campbell, and how it will affect the dischargeability of student loan debt as a whole. Until the Supreme Court resolves the current split as to what constitutes “undue hardship,” a law school graduate’s best hope may be to rely on the Campbell decision and argue that her bar loan is not an “educational benefit” under § 523(a)(8)(A)(ii).
Kaitlin E. Maloney is an Articles Editor of the Delaware Journal of Corporate Law and served as a judicial extern to the Honorable Kent A. Jordan on the Third Circuit Court of Appeals. Upon graduation Kaitlin will work as an associate attorney in the Wilmington office of Skadden, Arps, Slate, Meagher & Flom LLP.
Suggested Citation: Kaitlin Maloney, One of These Things is Not Like the Other: Student Bar Loan Distinguished from Traditionally Nondischargeable Student Loan Debt, Del. J. Corp. L (May 2, 2016), www.djcl.org/blog.