Bankruptcy Court Refused to Compel Arbitration in “Educational Loan” Adversary Proceeding Since it would Conflict with the underlying Purposes of Section 523(a)(8)

Bankruptcy Court Refused to Compel Arbitration in “Educational Loan” Adversary Proceeding Since it would Conflict with the underlying Purposes of Section 523(a)(8)

 In 2010, Plaintiff executed a promissory note (the “Note”) for a loan to pay for expenses associated with studying for a post-graduate bar examination (the “Loan”).  Navient is the servicer of this loan. The Note contains an arbitration clause. This provision generally provides that any past, present, or future legal dispute or any claim of any kind, including statutory and common law claims, and claims for equitable relief, that relate in any way to the Note, will be resolved by binding arbitration. Plaintiff does not dispute the applicability or enforceability of the arbitration provision.

Plaintiff filed a Chapter 7 bankruptcy case in this Court on August 22, 2016. She scheduled a $20,751.15 unsecured claim for a bar study loan, which represents the Loan.  About a month after she filed the petition, the chapter 7 trustee issued a report that there would be no distributions to creditors. Plaintiff commenced this adversary proceeding on November 22, 2016.

Plaintiff’s complaint contains two claims for relief. First, she seeks a determination pursuant to 28 U.S.C. § 157(B)(2)(I) that the Loan does not constitute a qualified educational loan within the meaning of 11 U.S.C. §523(a)(8) and therefore is not excepted from her discharge. Second, she requests a declaratory judgment remedy pursuant to 28 U.S.C. § 2201 that the Loan is not a non-dischargeable loan but instead is a dischargeable consumer loan. Contrary to Navient’s statement in the Motion, Plaintiff is not pursuing a determination that her debt is dischargeable under section 523(a)(8) of the Bankruptcy Code, as she is not seeking a hardship discharge.

Plaintiff  commenced this adversary proceeding to obtain a declaratory judgment that a certain loan serviced by defendant Navient Solutions, LLC (“Navient”) does not constitute a non-dischargeable student loan. In its Motion, Navient seeks to compel Plaintiff to submit her entire dispute to arbitration in accordance with an arbitration clause in the promissory note executed by Plaintiff. Navient further requests that the Court either dismiss Plaintiff’s claims or stay this action pending arbitration.

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