Student loans from private lenders have been notoriously immune to borrower bankruptcy filings, but in a new and encouraging ruling, a federal judge has deemed that some law school graduate debt can be cancelled during bankruptcy. The decision comes from Judge Carla Craig of the Brooklyn U.S. Bankruptcy Court and is already being called another step towards a larger reconsideration of student loans during bankruptcy.
As the Wall Street Journal reports, the ruling was in favor of Lesley Campbell, 36, a Pace University School of Law graduate who took out a $15K Citibank loan in 2009 to study for the bar. She didn't pass the bar and transitioned to the hospitality industry. Two years ago, she filed for bankruptcy and appealed the decision that the Citibank loan could not be dismissed following her filing.
In her decision, Judge Craig called the bar exam loan, "a product of an arm’s-length agreement on commercial terms" and, hence, not the kind of student loan that is usually shielded from cancellation during bankruptcy. As WSJ writes, the decision "contradicts the widely accepted notion that student-loan-related debt can only be canceled in bankruptcy under rare cases of extreme financial hardship."
Change on the horizon?
Experts and consumer protection advocates are already calling Judge Craig's ruling a significant decision in the larger legal reconsideration of student loans during bankruptcy. Some federal student loans are already "forgivable," but many now believe that those lent by private lenders should also be cancelled by a bankruptcy filing. "We’re starting to chip away at the absolute immunity of student loans from bankruptcy," Campbell's lawyer Austin Smith told reporters.
John Rao of the National Consumer Law Center agrees and believes that bankruptcy judges who have had a "knee-jerk reaction" to protecting private student loans are now changing their approach. "Judges are now starting to take a closer look," Roa said.
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