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Federal Bankruptcy Judge Rules that Debtor May Discharge Debts Incurred While Studying for the Bar Exam

A ruling recently released by the United States Bankruptcy Court for the Southern District of New York has declared that a debtor may be able to discharge debts that she incurred to support herself while studying for the bar exam. The petitioner in the case of Campbell v. Citibank had been a law student, and after graduating from law school she borrowed an additional $15,000 in “Bar Loans” from the defendant to help her pay for a bar exam review course and support herself while she studied for the exam and awaited the results. The court ruled that the Bar Loan taken out by the plaintiff was not a student loan, as interpreted under the law, and it was therefore dischargeable as if it were any other commercial loan.

law-books-291676_960_720The Latest Ruling Contradicts Rulings by Other Bankruptcy Courts

Previous rulings by other bankruptcy courts have denied bankruptcy debtors the discharge of Bar Loans without a showing of undue hardship, which is the same standard that must be met to discharge other student loan debt. The current U.S. Bankruptcy Code exempts debts incurred for an “educational benefit” from discharge, and this has commonly been interpreted to place Bar Loans and other student loans into the same category of debts that are not dischargeable through a bankruptcy proceeding.

In Campbell v. Citibank, the Court found that “the term educational benefit, as used in [the U.S. Bankruptcy Code], cannot properly be understood to include a consumer loan such as the Bar Loan.” The court went on to criticize the earlier rulings denying the discharge of Bar Loans as failing to address the most important issue, the meaning of the term “educational benefit” under the U.S. Bankruptcy Code.

Other Consumer Loans Made to Students May Also Be Dischargeable Going Forward

If the logic and analysis of the bankruptcy judge who decided this issue in Campbell v. Citibank stands, other debtors with Bar Loans, as well as other types of debts to for-profit companies incurred while studying or preparing for licensing exams (or in anticipation of further education and training) may be dischargeable in the future. Former students or trainees who have incurred large debts on unfavorable terms from for-profit banks that were called student loans by the bank may not be precluded from discharging these debts in a federal bankruptcy case. Debtors with questions about the possibility of discharging private debts incurred while they were a student should consult with a qualified bankruptcy attorney about the dischargeability of their debts.

Are You Overwhelmed in Debt?

If you or a loved one is over your head in debt and considering bankruptcy, a competent attorney on your side can increase the chances of successfully discharging your debts. The Louisville and Southern Indiana bankruptcy attorneys at the Schwartz Bankruptcy Law Center can take control of your case and advise you of the best way to get all of your eligible debts discharged. We advise and represent clients in various bankruptcy proceedings, and with our experience you can decide which course of action works best for you. We can help you get back on your feet. Call 866-366-3328 today to schedule a risk-free consultation or contact us through our website.

More Blog Posts:

Inherited IRA Retirement Accounts Not Exempt from Chapter 7 Bankruptcy, Kentucky Bankruptcy Lawyers Blog, published February 16, 2016.

U.S. Bankruptcy Judge Makes a Million-Dollar Ruling, Finding the Electronic “Currency” Bitcoin is Actually Property and not Currency, Kentucky Bankruptcy Lawyers Blog, published March 9, 2016.

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