Bar Exam Loans May Be Dischargeable in Bankruptcy

It’s well-known that federal student loans are very difficult, if not almost impossible to discharge in either Chapter 7 or Chapter 13 bankruptcy. There is another type of education loan that is lesser known to most people that is often thought of as nondischargable in bankruptcy, but a recent decision from New York indicates this may not always be the case.

What is a Bar Exam Loan?

Law school can put students almost $200,000 into debt, but that’s not where debt ends for them. After graduation, freshly minted JDs have to pass a bar exam to practice. California’s bar exam is widely considered to be the most difficult in the country. As the bar exam is extremely intense and can take more 10 hours a day to prepare for over the course of two months, few students choose to work during this period. Instead, they take out bar exam loans of up to $15,000, sometimes at more than 10 percent interest.

Though these loans do not necessarily come from federal lenders like Sallie Mae or Navient, and do not go to any school, courts have typically considered them student loans that cannot be discharged in bankruptcy, like loans that directly pay for tuition or housing.

The Campbell Decision

In the New York case In Re Campbell, the debtor took out a $15,000 bar exam loan following law school, but failed the bar exam and took a job as a secretary. She sought discharge of the bar exam loan and other debts under Chapter 7 bankruptcy.

While courts have often put bar loans in the same category as student loans, requiring that a debtor meet the high burden of “undue hardship” to be discharged under Chapter 7, the Campbell court strayed from precedent, finding that the bar loan was actually “a product of an arm’s-length agreement on commercial terms.” This puts the bar loan in the same category as a personal loan from a bank that is regularly discharged in Chapter 7 proceedings.

While the Campbell decision is a win for new lawyers and law graduates grappling with high debt, it’s important to note that this decision is not binding on any other court, including bankruptcy courts in California. However, the decision may persuade other courts in the U.S. to re-think how they view bar exam loans and reconsider discharging them in bankruptcy proceedings. A bankruptcy attorney can assist you in making legal arguments that a bar exam loan should not survive past bankruptcy.

Contact a Bankruptcy Attorney

If you’re thinking about filing for bankruptcy, an experienced bankruptcy attorney can walk you through the process. The Law Offices of Melanie Tavare  works with residents in San Francisco and many nearby communities on Chapter 7 or Chapter 13 bankruptcy. Contact the Law Offices of Melanie Tavare at 510-255-4636 or online.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.