An Example Why Private Student Loan Debt in Bankruptcy is Difficult

Just by looking at the facts surrounding dealing with private student loans and bankruptcy discharge, it appears more private student loans should be eligible for elimination as they are not protected.

But lenders have either taken to fighting hard to prevent discharge or smaller lenders seem to quietly give up and let the debt be discharged.

In 2013 I wrote a post talking about the technical reasons private student loans seem to be eligible for discharge.

Some of those student loans were originated as Tuition Answer loans. In 2016 I wrote about how Navient stated the loans may be dischargeable in bankruptcy.

Let’s Look at a Tuition Answer Bankruptcy Case

Taking a look at the case below can demonstrate how difficult it can be for the average person to get relief from student loans that Navient states are not protected in bankruptcy.

On Christmas Eve in 2009, a couple filed for Chapter 13 bankruptcy protection.

The bankruptcy trustee objected to the filing saying, “the plan “ma[de] no provision
for debtor’s non-dischargeable student loan.”

In April of 2010, the bankruptcy filing was amended. “On April 1, 2010, Plaintiffs filed an amended Chapter 13 plan (the “Plan”). This time, Plaintiffs indicated in Section V.E. of the Plan they had student loans and proposed to treat them “as an unsecured Class Four claim or as follows: deferred until end of plan.” The Court confirmed the Plan on May 4, 2010.”

On March 3, 2015, the bankruptcy discharge was granted.

In 2017 “the Court granted Plaintiffs’ motion to reopen their Chapter 13 case. Thereafter, Plaintiffs filed this adversary proceeding against Navient, requesting a declaratory judgment pursuant to 28 U.S.C. § 2201 and Fed.R.Bankr.P. 7001(9) that certain “Tuition Answer Loans” held by Navient are not excepted from discharge under 11 U.S.C. § 523(a)(8) and were, therefore, discharged upon entry of the Discharge Order. They also seek damages for alleged willful violations of the discharge injunction by Navient pursuant to 11 U.S.C. §§ 105 and 524.”

The debtors felt the Tuition Answer loans were actually not protected from discharge in bankruptcy. More importantly, they allege Navient was aware of this and yet attempted to collect on the loans following the bankruptcy discharge granted.

“Navient was notified of the Discharge Order. Instead of charging the Tuition Answer Loans off, Navient demanded payments in violation of the Discharge Order and the Bankruptcy Code. Plaintiffs allege “owing to [Navient’s] tactics, [P]laintiffs have repaid $37,460 on these discharged debts. These payments were not made ‘voluntarily’ but were made solely based on Defendant Navient’s material misrepresentations regarding the legal status and character of the Tuition Answer Loans.” Complaint, ¶33. Navient’s “abusive, deceptive and harassing collection efforts” after entry of the Discharge Order “were made knowingly and willfully in violation of this Court’s discharge orders and must be sanctioned.”

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Navient disagreed and said, “Navient argues dismissal is warranted because the Complaint, on its face, establishes the Tuition Answer Loans are excepted from discharge as “obligation[s] to repay funds received as an educational benefit” under Section 523(a)(8)(A)(ii).”

This is interesting considering that Navient has stated “Currently, private education loans made for qualified education expenses are generally not dischargeable by a borrower in bankruptcy. Private education loans can become dischargeable if the borrower proves that keeping the loans non-dischargeable would impose an undue hardship on the debtor and the debtor’s dependents. In addition, direct-to-consumer loans are disbursed directly to borrowers based upon certifications and warranties contained in their promissory notes, including certification of the borrower’s cost of attendance. This process does not involve school enrollment verification as an additional criteria and, therefore, may be subject to some additional risk that the loans were not used for qualified education expenses and thus could become dischargeable in a bankruptcy proceeding.” – Source

The issue about the Coast of Attendance (COA) is important. In the Adversary Proceeding filed by the debtors they alleged, “the Tuition Answer Program is a direct-to-consumer loan product outside the confines of the financial aid office and in excess of the school’s published “Cost of Attendance” (“COA”).”

The debtor said her actual COA for qualified tuition and related expenses for each year was: $5,340 in 2004, $10,650 in 2005, $6,450 in 2006, and $6,390 in 2007, as reflected on Tuition Statements issued by Lakeland College.” But she was granted more than that amount by Navient. “Plaintiffs borrowed an additional $107,467 through the Tuition Answer Loans, “made outside the financial aid office and [not] for qualified education expenses.”

It is a chronic problem faced by consumers getting a bankruptcy discharge that the court, at that time, makes no determination about which loans are or aren’t protected from bankruptcy discharge. That leaves debtors either going back to court to fight an expensive legal battle or pay the lender, in this case, Navient, for student loans they actually no longer owe.

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Navient’s position is the loans were protected in the discharge and still owed. The court document states, “the Plan does not say what Navient says it does. It is true the confirmed Plan is final and binds Plaintiffs and all of their creditors, including Navient. But the Plan did not specify one way or the other whether the Tuition Answer Loans were – or were not – discharged; the Plan is simply not instructive on this point. Section V.E. of the Plan only specifies Plaintiffs’ student loans – of which they had several, including Federal Stafford Loans owing to Great Lakes or its assigns – were “to be treated as an unsecured Class Four claim or as follows: deferred until end of plan.” Case No. 09-37480, Docket #25. The Plan is silent as to the dischargeability or non dischargeability of the Tuition Answer Loans vis-à-vis Plaintiffs’ other educational loans, or other unsecured debts. Nowhere in the Plan does it state the Tuition Answer Loans, or any of Plaintiffs’ student loans, were nondischargeable; Navient relies upon a mischaracterization of the terms of the Plan.” – Source

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Navient’s motion to dismiss the Adversary Proceeding was denied. Things then moved up to the Tenth Circuit Court of Appeals.

The consumers were represented by Austin Smith. His website is here.

On August 31, 2020, nearly 11 years since the original bankruptcy was filed, the Appeals Court. The Appeals Court said, “We, accordingly, uphold the bankruptcy court’s determination that the statutory exception to discharge set forth in § 523(a)(8)(A)(ii) does not cover the McDaniels’ Tuition Answer Loans.”

They kicked it back to the bankruptcy court saying,”In conclusion, we hold that the bankruptcy court did not err in ruling that the McDaniels’ confirmed Chapter 13 plan did not decide whether their Tuition Answer Loans are excepted from discharge in bankruptcy. We hold further that the bankruptcy court did not err in ruling that § 523(a)(8)(A)(ii) does not except student loans from discharge and, consequently, that the exception does not cover the McDaniels’ Tuition Answer Loans.” – Source

I wrote more extensively about the Appeals Court decision here but it’s important for people to understand the long fight it might take just to get a student loan lender to admit what they don’t want to admit – the loans can be eliminated in bankruptcy.

The case continues.

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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