Judge says Citibank's law-school loan isn't "student debt" and can be discharged in bankruptcy

The most toxic debt in America is student debt: your student loans (originated by universities, backed by the federal government, and handed off to banks, who securitize them) are subject to virtually unlimited (and uncontestable) penalties and fees, and are immune to bankruptcy, and are the only form of debt that can be taken out of your Social Security.

That's why it's so important that Judge Carla Craig of Brooklyn's US Bankruptcy Court just ruled that a "bar loan" that Citibank offered to law students isn't a student loan, "The fact that [Citibank's] underwriting standards required [Campbell] to be a law student does not turn an arm's length consumer credit transaction into a 'benefit' within the meaning of [the bankruptcy code]."

The bankruptcy case was fought by Lesley Campbell, who graduated from Pace University Law School in 2009 with nearly $300,000 in student loans, and ended up in a $50,000/year job at a hotel.

Campbell's lawyers described the ruling as "a seismic development" that "flips the script for thousands of people who our client believes have fallen victim to predatory loan practices and been told they cannot discharge these loans."

If the ruling stands, you can expect many of America's struggling ex-students — especially Millennials, who face dismal job prospects despite advanced degrees — to use the bankruptcy system to walk away from the usurious conditions imposed upon them by some of the nation's biggest, most profitable financial institutions.

U.S. bankruptcy code states that among the obligations that can't be canceled include funds received as an "educational benefit," scholarship or a stipend. Campbell wanted the loan to be canceled, or "discharged," when seeking bankruptcy relief, arguing that it wasn't an "educational benefit" under the U.S. bankruptcy code. Citibank moved to dismiss that claim, arguing that the loan was an "educational benefit" in the fact that the eligibility for the bar loan was dependent on the plaintiff being a law student.

But Judge Carla Craig of U.S. Bankruptcy Court in Brooklyn wrote in her decision on Thursday, "However, this argument could be advanced by the myriad private lenders who provide funds to borrowers who are taking educational or training courses."

"The fact that [Citibank's] underwriting standards required [Campbell] to be a law student does not turn an arm's length consumer credit transaction into a 'benefit' within the meaning of [the bankruptcy code]," Craig wrote in her opinion.

Judge's Ruling on Law School Grad's Debt Could Signal 'Seismic' Shift in Loan Practices
[Susanna Kim/ABC]

(via Naked Capitalism)


(Image: Pixabay)