Judge's Ruling on Law School Grad's Debt Could Signal 'Seismic' Shift in Loan Practices

PHOTO: A law school grad, Lesley Campbell, had some of her school debt canceled in bankruptcy court.Getty Images
A law school grad, Lesley Campbell, had some of her school debt canceled in bankruptcy court.

A judge's recent ruling that part of a law school graduate's loans can be canceled breaks new ground for other students who owe a mountain of debt.

Lesley Campbell applied for a loan while she was studying for the bar as a student at Pace University Law School in 2009. She received a "bar loan" of $15,000 from Citibank, a bankruptcy court document states, and she made payments on the loan until June 2012. But in November 2014, after having failed the bar exam, she filed for Chapter 7 bankruptcy protection.

With nearly $300,000 in student loan debt, Campbell, of Brooklyn, New York, found an administrative job with a hotel management company that paid about $50,000, according to a bankruptcy document.

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.

"This opinion confirms what we have believed all along -- that these types of loans are dischargeable,” Campbell's lawyer, William Brewer III, of the Brewer Storefront, said in a statement. The Brewer Storefront is the community service affiliate of the law firm Brewer, Attorneys and Counselors.

“We believe this is a seismic development. It 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," Brewer added.

A spokesman for Citibank declined to comment to ABC News regarding the decision.

John Rao, attorney with the National Consumer Law Center who is not involved in this case, applauded the judge's decision. He said most student loans are "nondischargeable" under the bankruptcy code, because they're insured by the government, and this private loan didn't fit that category.

Though there have been cases involving student loans in which judges have ruled the opposite way of Judge Craig, this recent decision may affect other future cases, Rao said.

"The judge got it right and we are really happy to see that," Rao said of Craig's decision.

Asked whether this ruling could adversely affect the market for these loans or law school grads who want to apply for bar loans, Rao said it was doubtful.

"People don’t make loans thinking they’ll file bankruptcy," Rao said. "Certainly there are people who go through that process and don’t ever become lawyers. But the vast majority of people who get those loans get a law degree, pass the bar and don't file for bankruptcy."