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Ruling on Law School Grad’s Debt May Signal Shift in Loan Practices

A Brooklyn bankruptcy judge may have set a new precedent in her ruling of a recent case. Judge Carla E. Craig ruled that a law school graduate was allowed to discharge the unpaid portion of a loan she received from Citibank when she was studying for the bar exam.

Lesley Campbell attended Pace University Law School in 2009 and, as preparation for her bar school exam, took out a “bar loan” from Citibank in 2012. After Campbell did not pass the bar exam in 2014, she found herself with over $300,000 in student loan debt, so she filed for Chapter 7 bankruptcy to relieve her of some of her other financial obligations.

What Student Debt Can Be Discharged?

The U.S. bankruptcy code states that debt received as a scholarship, stipend, or other benefit to education cannot be discharged in bankruptcy. Because student loans fall under the definition of “educational benefit,” Campbell could not get them forgiven. However, she requested that her Citibank loan be discharged because it was not an educational benefit, as defined by the U.S. code. Citibank disagreed, citing that the reason she qualified for the loan was because she was a law student studying for the bar exam.

Judge Craig concurred with Campbell and allowed the loan to be discharged. The judge deemed the loan to be nothing more than a regular consumer loan, because it required a credit check and was distributed by a for-profit company, as opposed to government-backed student loans. As part of her 20-page ruling, Judge Craig said, “[t]he fact that defendants’ underwriting standards required plaintiff to be a law student does not turn an arm’s-length consumer credit transaction into a ‘benefit’ within the meaning of [the U.S. bankruptcy code].”

While the judge’s ruling does not change the fact that student loans cannot be discharged in bankruptcy, it does open up a new opportunity for students who are deeply in debt (provided the ruling doesn’t get overturned.) Recent college graduates are facing both the largest amount of student loan debt in history and some of the bleakest prospects in employment, so anything they may be able to do to lighten their financial burden will be a great benefit.

William Brewer, III, who was Campbell’s attorney, was satisfied with the ruling, saying, “[w]e believe this is a seismic development. It flips the script for thousands of people who our client [Lesley Campbell] believes have fallen victim to predatory loan practices and been told they cannot discharge these loans.”

Falling Behind On Your Student Loans? Our Ohio Bankruptcy Attorneys Can Help.

If you find yourself in a similar situation where you’re trying to make payments on your debt but you can’t seem to make ends meet, you might need the help of an Ohio bankruptcy attorney. Luftman, Heck & Associates has the experience and compassion their clients so desperately need in their trying times. For a free consultation, call (216) 586-6600 or email us at advice@clevelandbankruptcyattorney.com to discuss your options and get your questions answered.