Bank Must Prove Student Loans Can’t Be Wiped Out in Bankruptcy

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By Diane Davis

A bank must prove that private student loans are qualified education loans to prevent them from being wiped out in bankruptcy, the U.S. Bankruptcy Court for the District of Maine held.

The record was “not sufficiently developed” to find that loans in this case do or don’t constitute “qualified education loans,” Judge Michael A. Fagone wrote Dec. 21 in denying Wells Fargo Bank, N.A.'s motion to dismiss a debtor’s attempt to wipe out the obligation in court.

While it isn’t a “comprehensive roadmap for resolution of parties’ disputes,” the opinion demonstrates “why summary judgment is not appropriate on this issue on this record,” the court said.

Summary judgment is only appropriate if there are no genuine issues of material fact in dispute and the party is entitled to judgment as a matter of law, the court said.

Austin Smith, a consumer litigator in New York who focuses on student loans, told Bloomberg Law Jan. 2, that the decision was the first time a judge had explained “exactly what a creditor needs to prove to make private student loans non-dischargeable” in bankruptcy.

“Congress didn’t except all student loans from discharge—only those that fall within the statute. You need to prove this thing is a qualified education loan,” Smith said.

Too Many Gaps, Record Not Clear

Bankruptcy Code Section 523(a)(8)(B) refers to section 221(d)(1) of the Internal Revenue Code for the definition of “qualified education loan.” That definition requires a taxpayer to incur a debt, the taxpayer or spouse to incur “qualified higher education expenses,” the debt to be incurred solely to pay for those expenses, and the expenses to be attributable to education furnished while the recipient was an “eligible student.”

Jeffrey Wiley obtained two loans from Wachovia Bank of Delaware, N.A. He used the money to pay for tuition, books, and food expenses for a certificate program offered by Rutgers Professional Golf Management School through the Cook College Office of Continuing Professional Education.

Wells Fargo bought Wachovia and assumed the loan agreements that stated they were guaranteed by The Education Resources Institute, Inc. (TERI), a nonprofit institution, but the program wasn’t an accredited institution. Wiley filed Chapter 7 and obtained a discharge of his debt. He asked the court to determine that the loans were dischargeable in bankruptcy because they weren’t loans used to pay for “qualified educational expenses.”

Discharging student loans in bankruptcy is very difficult, and the bank had to prove that Wiley’s obligations couldn’t be wiped out.

But the court found no evidence the loans were made under a program funded by a nonprofit institution. Simply asserting that they were “guaranteed by TERI” isn’t enough, it said.

There are numerous “gaps” in the record and it just isn’t clear. There also isn’t enough information in the record to determine if Wiley was an “eligible student,” the court said.

Smith said the court told the creditor here exactly what it needed to prove, including that the program must be accredited under federal education law.

“Just because the promissory note said this was a ‘qualified education loan’ isn’t proof of anything,” he said.

“Student borrowers need to stop taking the lender’s word for it that these debts are non-dischargeable,” Smith said.

Counsel for Wells Fargo wouldn’t comment on the case, telling Bloomberg Law Jan. 3 that the matter remains in active litigation.

Thomas F. Shehan, Jr., Searsport, Me., represented Jeffrey D. Wiley; Trustee Nathaniel R. Hull, Verrill Dana, LLP, Portland, Me., represented himself; F. Bruce Sleeper, Jensen, Baird, Gardner & Henry, Portland, Me., represented Wells Fargo Bank, N.A.The case is Wiley v. Wells Fargo Bank, N.A. (In re Wiley) , Bankr. D. Me., Adv. Proc. No. 16-1026, Case No. 16-10485 Chapter 7, 12/21/17 .

To contact the reporter on this story: Diane Davis in Washington at ddavis@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com

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