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McDaniel v. Navient Solutions, LLC.

No. 18-1445. Bankr.D.Colo. Judge Holmes. Chapter 13 Bankruptcy—Res Judicata—Exceptions to Discharge of Debts—Student Loans.

August 31, 2020

Plaintiffs filed a Chapter 13 bankruptcy petition and the court confirmed their amended plan in 2010. In 2015 plaintiffs certified that they had met the plan’s payments and obligations, and the court granted them a discharge of debts under 11 USC § 1328(a). The order did not specifically identify the debts that were discharged and stated that debts for most student loans were not discharged. Plaintiffs continued to make payments toward their student loans.

In 2017, plaintiffs moved the court to reopen their case. Plaintiffs then filed a complaint against Navient Solutions, LLC (Navient), the creditor for the student loans, seeking a declaratory judgment that their student loans were discharged in bankruptcy and damages based on collection activities in violation of 11 USC § 524(a). Navient moved to dismiss the complaint, and the court denied the motion.

On interlocutory review, Navient contended that plaintiffs’ confirmed Chapter 13 plan makes it res judicata that its student loans were excepted from discharge. While a confirmed plan is res judicata, plaintiffs’ confirmed Chapter 13 plan did not decide whether their student loans were excepted from discharge, so the issue is not res judicata under that plan. Therefore, plaintiffs may still litigate their claim that the loans were discharged in bankruptcy.

Navient also argued that the bankruptcy court erred in ruling that 11 USC § 523(a)(8)(A)(ii) does not except student loans from discharge and, consequently, the exception does not cover plaintiffs’ student loans. Navient contended that the student loans are nondischargeable because an educational loan constitutes “an obligation to repay funds received as an educational benefit, scholarship, or stipend” within the meaning of § 523(a)(8)(A)(ii). Section 523(a)(8)(A)(ii) excepts from discharge “an obligation to repay funds received as an educational benefit,” unless doing so imposes undue hardship on the debtors and their dependents. The Tenth Circuit construed the statute and concluded that an obligation to repay funds received as an educational benefit is akin to a stipend or scholarship, as opposed to a loan of funds for education. Thus, the statutory terms “obligation to repay funds received as an educational benefit” and “educational loan” mean separate things, and plaintiffs’ student loans are not covered by the discharge exception set forth in § 523(a)(8)(A)(ii). Therefore, the bankruptcy court did not err.

The interlocutory order denying Navient’s motion to dismiss plaintiffs’ dischargeability claim was affirmed and the case was remanded for further proceedings.

Official US Court of Appeals for the Tenth Circuit proceedings can be found at the US Court of Appeals for the Tenth Circuit website.

Related Topics

Chapter 13 Bankruptcy Res Judicata Exceptions to Discharge of Debts Student Loans

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