Loan for Medical Prep Course Can Be Wiped Out in Bankruptcy

Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.

By Diane Davis

A debtor’s private loan to attend a medical preparation course isn’t an “educational benefit” under bankruptcy law and can be wiped out in her Chapter 7 case, the U.S. Bankruptcy Court for the District of Maryland held ( Essangui v. SLF V-2015 Tr. (In re Essangui) , 2017 BL 351786, Bankr. D. Md., No. 16-00201-MMH, 10/2/17 ).

“To hold otherwise would ignore the plain language of the statute” and render other subsections “largely meaningless,” Judge Michelle M. Harner wrote Oct. 2.

“Congress worked to strike a delicate balance between the fresh start policy for debtors and the protection of certain educational programs and lenders offering loans for such programs,” the court said.

Bankruptcy Code Section 523(a)(8) includes three subsections addressing educational debt that can’t be discharged in bankruptcy.

There is a growing split among courts addressing this issue, and there is no precedent on point in the Fourth Circuit, the court said.

A majority of courts interpret the statute broadly, focusing on the overarching policy objectives of enhanced fairness and eliminating abuse in the system, the court said. In this line of cases, any loan used at least in part for educational purposes wouldn’t be dischargeable, the court said.

The minority view, however, focuses on the precise language and structure of the statute and presumes Congress intended each subsection to have a distinct function and target different kinds of debts, the court said.

Yolande Essangui borrowed more than $23,000 from Citibank, the loan orginator, to attend a Medical Education Readiness Program before enrolling in medical school.

Later, when Essangui filed Chapter 7, she wanted to wipe out the debt in bankruptcy.

The creditor argued that the loan wasn’t dischargeable under Section 523(a)(8)(A)(ii), as “an obligation to repay funds received as an educational benefit, scholarship, or stipend.”

The court agreed with the minority’s viewpoint. The loan was used by Essangui for educational purposes, but that isn’t enough to bring it within the subsection for protection, the court said.

Ronald J. Drescher, Drescher & Associates, Baltimore, represented Essangui; Firstmark Services, Lincoln, Neb., represented itself; Golden Tree Asset Management, LLP, New York, represented itself; Citibank, N.A., Sioux Falls, S.D., represented itself; DeVry Medical International, Inc., Brookfield, Wis., represented itself; Charles Alan Malloy, Arnold & Porter LLP, Washington, represented GSED Trust; and Michael J. Klima, Jr., Peroutka, Miller, Klima & Peters, P.A., Pasadena, Maryland, represented SLF V-2015 Trust.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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