In a remarkable ruling last week, a federal bankruptcy judge slammed a major student loan servicer, affirming the discharge and cancellation of hundreds of thousands of dollars in federal student loan debt while imposing additional penalties of over $378,000.
In Leary v. Great Lakes Education Loan Services, Sheldon Leary sought to discharge $416,877.56 in federal student loans in bankruptcy. It is very difficult, although not impossible, for student loan borrowers to discharge their student debt through bankruptcy. The bankruptcy code treats student loan debt differently from most other forms of consumer debt, such as credit cards and medical bills. Borrowers must generally prove that they have an “undue hardship” in order to discharge their student loan debt in bankruptcy. The “undue hardship” standard applied to student loan debt is not adequately defined in statute, so bankruptcy judges have established various tests (which vary by jurisdiction) to determine discharge eligibility.
In order to show that they meet this standard, borrowers must initiate an “adversary proceeding,” which is essentially a lawsuit within the bankruptcy case that is brought against the borrower’s student loan lenders. Through the adversary proceeding, the borrower must present evidence showing that they meet the undue hardship standard, while the student lenders present opposing evidence. The adversary proceeding can be a long and invasive process for borrowers, and can get quite expensive for those who retain a private attorney. Student loan lenders may also have significantly more resources than borrowers, which can give them an edge in the litigation. As a result, many student loan borrowers are unsuccessful in proving undue hardship, and many others don’t even try.
In 2015, Mr. Leary initiated a bankruptcy adversary proceeding against the U.S. Department of Education and its contracted loan servicer, Great Lakes Higher Education. But Great Lakes did not respond to, or otherwise participate in, the adversary proceeding. As a result, in March 2016 the bankruptcy court ruled in Mr. Leary’s favor and discharged his federal student loans, since his petition was unopposed.
U.S. Bankruptcy Court Judge Martin Glenn wrote in his decision that, “Over the next five years, multiple notices and orders in connection with the default judgment Mr. Leary obtained against Great Lakes in March 2016 discharging the student loan debt were simply ignored by Great Lakes.” The U.S. Dept. of Education and its contractors continued efforts to collect on the debt, in spite of the earlier discharge order, and even threatened to garnish Mr. Leary’s wages.
Mr. Leary fought back by filing a motion for contempt. Judge Glenn noted that Great Lakes ignored that motion as well, and did not participate in subsequent related proceedings.
“After repeated unsuccessful attempts to get Great Lakes to respond to this Court’s scheduling orders,” Judge Glenn wrote, “the Court entered an order to show cause why sanctions should not be imposed on Great Lakes. Great Lakes ignored that order as well, so the Court entered an order imposing sanctions on Great Lakes in the amount of $123,625.52.” Great Lakes’ counsel acknowledged that the orders were served and received, but it ignored the sanctions order, as well.
Finally, at a hearing in August, Judge Glenn wrote that Great Lakes’ counsel acknowledged receiving all orders and motions related to the case. Counsel blamed an “unintentional procedural error” for Great Lakes’ failure to respond or participate.
Judge Glenn did not buy this explanation, and issued a scathing decision against Great Lakes. “The Court finds this cavalier excuse wholly unsatisfactory,” he wrote. “Great Lakes’ indifference to this proceeding — in which it has been a named defendant since September 2015 — seriously prejudiced Mr. Leary.” The court affirmed the prior bankruptcy discharge of Mr. Leary’s $416,877.56 in federal student loan debt, and tripled sanctions against Great Lakes to $354,629.62, payable to the Dept. of Education (which claimed that was the amount Mr. Leary still owed on his federal student loans).
The judge imposed an additional $24,000 penalty on Great Lakes, which he ordered must be paid to Mr. Leary directly “for the harm he suffered over the last five years as a result of negative credit ratings, aggravation, loss of sleep and worry, harassment, pain and suffering, in addition to contributing marital strain.” The judge also ordered both Great Lakes and the Dept. of Education to report the discharged loans as “paid in full” to credit bureaus.
The ultimate impact of this decision will likely be quite narrow, as it is limited to the specific, unique circumstances of this case. Had Great Lakes responded to Mr. Leary’s adversary proceeding and subsequent motions and participated in required court hearings, the matter may have turned out quite differently.
Nevertheless, the decision is an important ruling, and serves as a reminder that pursuing a bankruptcy discharge of student loan debt is not necessarily a lost cause, despite the many hurdles.
The case is Leary v. Great Lakes Education Loan Services, Case No. 15-11583 in the United States Bankruptcy Court for the Southern District of New York. The decision indicates that Mr. Leary was pro se, meaning he did not have legal representation.
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