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Bankruptcy: In re Taylor

Posted: Mon Oct 24, 2005 8:36 pm
by David A. Szwak
In re Taylor,
252 B.R. 201, Bankr.N.D.Ala., Jun 26, 2000

Chapter 7 debtor brought adversary proceeding to recover for government entity's alleged violation of anti-discrimination provision of the Bankruptcy Code, in denying student loan based solely upon debtor's bankruptcy filing. The Bankruptcy Court, James Scott Sledge, J., held that: (1) power granted to bankruptcy court to make any necessary or appropriate determination enabled court to recognize right of action on part of debtor against government for allegedly violating anti-discrimination provision of the Bankruptcy Code; (2) government violated anti-discrimination provision of the Bankruptcy Code; and (3) debtor was entitled to emotional distress damages in amount of $12,000.
Judgment for debtor.

The Defendant argued at Trial that the credit report did not show the debt was discharged and, accordingly, it was reasonable for Sallie Mae to deny the loan without further investigation. On the contrary, the language of section 525(c) explicitly places a burden on the government or person engaged in a business that includes the making of student loans to investigate and determine whether the loan is dischargeable. The fact that the wording of section 525(c) includes debts that are "dischargeable" instead of simply discharged debts indicates the lender must make a determination as to whether the loan will be or could be discharged in the bankruptcy case. A credit report only has the capacity to show whether a debt has been discharged. [FN2] It does not and could not show whether a debt is dischargeable. Consequently, the lender has to look beyond the credit report to ensure it does not violate section 525(c). In the present case, the lender relied, to its detriment, solely on the credit report and denied the loan in violation of section 525(c).


FN2. The fact that a credit report sometimes notes that debts were discharged does not mean it is an authoritative source. In fact, in the present case the debt to the City Bank of Childersburg was not noted as discharged on the credit report despite the fact that it was discharged on February 27, 1997. (Tr. at 81, 24-25).


The Defendant argues that a debtor can reapply for a loan that is denied by providing a co-signor or a statement from his or her creditors that the debts have been satisfied. There are two problems with this contention. First, the debtor is allowed to reapply after being denied, which is a violation of section 525(c). Second, the practical effect of the reapplication requirements is equivalent to denial. The debtor would not be able to provide adequate assurance from his or her creditors that the debts were satisfied unless the debtor had been discharged and had paid 100% of all debts through the bankruptcy. Though this does happen sometimes, it is often not true. Almost no Chapter 7 debtors pay 100% of all debts, and a small percent of Chapter 13 debtors pay all debts, but only after payments for five years. Consequently, most debtors would not be eligible under this option. The co-signor option forces the debtor to enlist another person to guarantee the debt. The student loan is still denied to the debtor but is approved to the co-signor. That, of course, presumes every debtor could find a co-signor. The practical effect of the education statute and the regulation is to deny student loans to anyone who has filed for bankruptcy.

The Court concludes the Defendant violated section 525(c) in two different instances. The first violation of section 525(c) occurred when Sallie Mae canceled the second distribution. The second violation occurred when Sallie Mae rejected the Plaintiff's second application. As applied by Defendant, the statute, 20 U.S.C. § 1078-2(a) (1992), and regulation, 34 C.F.R. § 682.201(b)(1), governing PLUS loans violates 11 U.S.C. § 525(c). Having established that the Defendant violated section 525(c), the Court must next determine what recourse is available to the Plaintiff.