Bar Exam Loans Are Dischargeable Debt

By Melissa Stanzione

March 29 — Bar exam loans are dischargeable debt in bankruptcy proceedings, the U.S. Bankruptcy Court for the Eastern District of New York held March 24.

These loans aren't “educational benefits,” which are an exception to discharge under federal law, Judge Carla E. Craig wrote for the court.

Split With Courts

The court split with bankruptcy courts in North Dakota, New Jersey, Alabama and Pennsylvania, which have held that an “educational benefit” is “any loan which relates in some way to education.”

This “broad interpretation” of discharge exceptions under federal law “would render superfluous most of the other provisions” of the statute, the court said.

Nondischargeable obligations are listed under 11 U.S.C. §523(a)(8)(A)(ii), and “when a statute contains a list, each word presumptively has a ‘similar' meaning,” it said.

The other terms in the list—“scholarship” and “stipend”— are not generally required to be repaid and so “in the absence of plain meaning to the contrary or compelling legislative history,” an educational benefit refers to “something other than a loan,” the court said.

The statute's legislative history and purpose support the finding “that a consumer loan such as the Bar Loan is not what is meant by ‘benefit' ,” it said.

Simply requiring a borrower to be a law student doesn't “turn an arm's-length consumer credit transaction into a ‘benefit' within the meaning of §523(a)(8)(A)(ii),” the court said.

Split Over Student Loan Debt

Circuits are similarly split over another provision of Section 523 as it relates to student-loan debt. This type of debt may be discharged if payment would cause an “undue hardship” under Section 523(a)(8).

The U.S. Supreme Court denied certiorari in Tetzlaff v. Educ. Credit Mgmt. Corp., U.S., No. 15-485, review denied 1/11/16, a case that might have resolved the split as to how to analyze “undue hardship.”

Brewer Storefront PLLC represented Campbell. Locke Lord LLP represented the defendants.

To contact the reporter on this story: Melissa Stanzione in Washington at mstanzione@bna.com

To contact the editor responsible for this story: Jessie Kokrda Kamens at jkamens@bna.com