SW Legal studies in Business

Students Loans Rarely Dischargeable in Chapter 13 Bankruptcy
Description Court reversed the bankruptcy court decision that student loans could be discharged. Such discharge is allowed only if there is a showing of undue hardship on the debtor and the creditor must have the opportunity to participate in an adversarial proceeding on the matter.
Topic Bankruptcy
Key Words Student Loan; Discharge
C A S E   S U M M A R Y
Facts Banks borrowed $23,000 from SallieMae under a student loan note bearing an annual interest rate of nine percent. Six years later he filed a petition for Chapter 13 bankruptcy asking that the obligation, which had risen to $31,571, be reduced to $4,030 and that all interest and late charges on the student loan be eliminated. Soon after he filed for bankruptcy, SallieMae assigned its claim for $31,571 to Great Lakes Higher Education Corporation, which assigned it to ECMC. SallieMae and Great Lakes received copies of the proceedings. The bankruptcy court later approved Banks' plan and closed the case. Sallie Mae later sent Banks a notice that we owed $43,342 on the loan. The bankruptcy court granted Banks' request that his obligation be limited to $4,030 and would not reopen the case. ECMC appealed to the district court.
Decision

Reversed. Student loans are nondischargeable absent an undue hardship. When a debtor fails to demonstrate or even allege that he would suffer an undue hardship if forced to repay his student loan debt, then the discharge of the debt in Chapter 13 is improper. Because discharges of student loans is unusual, if a bankruptcy court considers it, there must be clear notice, service, and summons to the creditors so they have the opportunity to participate in an adversary proceeding. Since there was no heightened notice to the creditors, the discharge was improper.

Citation SallieMae Servicing v. Banks, 271 B.R. 249 (W.D. Va., 2001)

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