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.
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.