Canceling Bar Loans Through Consumer Bankruptcy
If you borrowed student loans to finance your law school education, it is likely that you also sought out loans to pay for your bar review courses and other study materials. It can be very costly to study for the bar in Illinois and other states throughout the country, and as a result, law school graduates often borrow between $10,000 and $20,000 to pay for the costs associated with studying for and taking the bar alone. That figure does not include the average cost of a law school education, which tends to be in the hundreds-of-thousands-of-dollars range. Yet according to a recent article in The Wall Street Journal, a federal judge ruled that bar-exam loan debt is different from other student loan debt and thus should be dischargeable through consumer bankruptcy.
If you have thousands of dollars in bar-exam loan debt and you do not have adequate income to pay your monthly bills, could filing for Chapter 7 bankruptcy help you with your financial situation?
Bar-Exam Loans are Different From Traditional Student Loans
What is the key takeaway from this recent case? In short, a federal judge in a U.S. Bankruptcy Court in Brooklyn, New York concluded that bar-exam loans are “different from traditional federal student loans that are rarely canceled by bankruptcy.” How did the judge reach this conclusion? She reasoned that debt from bar-exam loans is “a product of an arm’s-length agreement on commercial terms,” and thus does not “fall into the category of student loans that stick with a borrower who files for bankruptcy.”
This decision could set an important example for bankruptcy courts in Illinois and throughout the United States when it comes to Chapter 7 filings concerning former law school students. While the decision will not bind other courts, it might help other bankruptcy judges in their reasoning. As the article underscores, the decision contradicts the traditionally held view that debt related to education can only be discharged through bankruptcy on rare occasions. Tthe judge’s decision suggests that some forms of student debt (depending upon what the loan was intended to pay for) may not look like the types of student loans that have proven difficult to discharge through Chapter 7 bankruptcy protection.
Specifically, loans that do not have an “educational benefit,” according to the judge, look more like commercial loans or standard consumer loans than like student loans. How such determinations will be made in future bankruptcy cases remains to be seen.
Background of the Recent Case
How did this case begin? The facts of the case are important for making clear when a loan may or may not have an “educational benefit” as the judge defined it. In this case, a 36-year-old law school graduate took out a private loan from Citibank for $15,000 to cover bar-exam prep. She did not pass the bar, and she ended up taking a secretarial job that paid an annual salary of $49,000. With almost $300,000 in student loan debt and other financial difficulties, she filed for consumer bankruptcy.
In other words, the bar-exam loan did not provide an educational benefit since the former student did not pass the bar. The debtor is not unlike many law school graduates who have been unable to secure employment as attorneys. According to an article from the National Association for Law Placement (NALP), about 15 percent of law graduates from the Class of 2014 were not employed, and that is after many law schools saw a decline in enrollment (thus, fewer law graduates altogether).
If you have questions about discharging certain types of debt, an experienced Oak Park bankruptcy attorney can assist you. Contact the Emerson Law Firm today.
See Related Blog Posts:
Using the “Borrower Defense” to Wipe Out Your Student Loans
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