Judge Says Bankrupt Law Grads Can Cancel Bar Loans
25 Marzo 2016 - 11:10PM
Dow Jones News
A federal judge ruled law-school graduates who file for
bankruptcy protection can cancel the debt they racked up while
studying for the bar exam, finding such loans are different from
traditional federal student loans that are rarely canceled by
bankruptcy.
In an opinion filed Thursday, Judge Carla Craig of the U.S.
Bankruptcy Court in Brooklyn, N.Y., said bar-exam loan debt is "a
product of an arm's-length agreement on commercial terms" and
doesn't fall into the category of student loans that stick with a
borrower who files for bankruptcy.
The decision, which is the most thorough recent ruling on the
matter, contradicts the widely accepted notion that student
loan-related debt can be canceled in bankruptcy only under rare
cases of extreme financial hardship.
In her 20-page ruling, Judge Craig said bar-study loans were
akin to commercial or consumer loans and weren't an "educational
benefit," like a scholarship or stipend, and thus could be erased
in a bankruptcy case.
The case involves 36-year-old Lesley Campbell, a 2009 Pace
University School of Law graduate who had asked the court to cancel
the unpaid portion of a $15,000 loan she took out from Citibank to
study for the bar.
Ms. Campbell, a Brooklyn resident, didn't pass the bar exam
after graduating in 2009 and took a secretarial job with a $49,000
annual salary at a hotel management company, she said. She filed
for bankruptcy in 2014.
Although her bar-study loan was only a small portion of Ms.
Campbell's nearly $300,000 student loan debt, the ruling comes at a
time when consumer advocacy groups and some federal lawmakers are
pushing for students to be able to use bankruptcy to get at least
some relief.
The U.S. Supreme Court recently declined to hear a case that
could have made it easier to get rid of student loan debt. The
White House, however, said last year that it would examine whether
it should be easier for student loans to be canceled by bankruptcy,
opening the door for student debt made by private lenders to be
treated on par with credit-card debt and mortgages.
"We're starting to chip away at the absolute immunity of student
loans from bankruptcy," said Austin Smith, Ms. Campbell's
lawyer.
A Citibank lawyer declined to comment on the ruling or to say
whether the bank plans to appeal.
Judge Craig's ruling isn't binding on other courts but may be
helpful to other bankruptcy judges with similar disputes before
them.
Judge Craig isn't the first federal judge to take up the issue
of whether bar-study loans can be wiped out in bankruptcy. Her
ruling conflicts with an April 2010 decision from Alabama
Bankruptcy Judge Jack Caddell, who said a University of Alabama
School of Law graduate couldn't cancel a $9,475 bar-study loan.
Bankruptcy judges have historically had a "reflexive, knee-jerk
reaction that if anything like a student loan, it's
nondischargeable," said John Rao of the National Consumer Law
Center.
"Judges are now starting to take a closer look," he said.
The ruling comes as total student debt has more than doubled
since 2007.
"We've come to a place where student loan debtors are very much
backed into a corner," said Greta LaMountain Biagi, a bankruptcy
lawyer in Amherst, Mass. "This judge clearly to me understands that
and is in touch with that."
Several major lenders, including Wells Fargo & Co., PNC
Financial Services Group Inc., Discover Financial Services Inc. and
Sallie Mae Inc., offer bar-exam loans typically of up to $15,000 to
pay for a law-school student's time after graduation—a period when
many study for the bar exam but haven't begun working in the field
yet.
They are similar to medical students who have access to
residency and relocation loans, said Mark Kantrowitz, a
Chicago-based publisher at Cappex.com, a website that connects
students with colleges and scholarships.
"They're low-risk for the lender because you know the individual
has already received their degree. They just have to pass the bar
or their medical boards," he said.
Ms. Campbell has a new job as a legal document reviewer and
plans to retake the bar exam in February. She said she is current
on student loan payments.
Write to Katy Stech at katherine.stech@wsj.com
(END) Dow Jones Newswires
March 25, 2016 17:55 ET (21:55 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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