Victory for Chapter 7 Debtor in Student Loan Discharge Case

As a Chapter 7 and Chapter 13 bankruptcy attorney in Sacramento I frequently receive calls from people who consider bankruptcy because they have oppressive student loan debt. Student loans are a major issue for many bankruptcy filers. I predict these issues will continue to increase and the laws will ultimately need revision as the problems surmount; students, have been denied the opportunity to discharge their debt even when the amounts are astronomical and the student has little means to make payments.

In what can be considered a victory for individuals with student loans, the Sixth U.S. Circuit Court of Appeals decided in In re Gourlay that Sallie Mae, the student loan organization, could not set a default judgment aside that had been obtained by debtor Kristin Gourlay. Sallie Mae failed to respond to adversary proceeding filed by Gourlay which attempted to find the debt dischargeable. The Sixth Circuit found that the bankruptcy court was within its rights to find that the failure was not excusable neglect, the court said; service was proper and the appropriate person simply failed to respond.

Kristin Gourlay filed for Chapter 7. During the case she filed an adversary proceeding seeking to determine the dischargeability of her student loans owed to Sallie Mae. She owed Sallie Mae approximately $25,500. Her bankruptcy attorney sent Sallie Mae a timely summons by certified mail, and the return card was signed by someone believed to be a part time employee at the company’s Virginia headquarters. The deadline for a response came and went without a response from Sallie Mae. Gourlay filed for a default judgment about a week later. The Bankruptcy Court intitially rejected her motion due to improper service. However, Gourlay served the summons again. When there was still no response, the bankruptcy court granted her second motion for default judgment. Eighteen days after the default judgment became final, Sallie Mae moved to set it aside for excusable neglect. The Bankruptcy Court ultimately rejected this, finding that internal breakdowns are not excusable neglect, and Sallie Mae appealed.

On appeal, Sallie Mae argued that its failure to respond was not prejudicial; that Gourlay’s complaint was insufficient in any case; that she failed to follow local notice rules; and that service was not proper. The Sixth U.S. Circuit Court of Appeals rejected all of these arguments. On the sufficiency of Gourlay’s complaint, the court found that Sallie Mae could no longer present these arguments, having waited past the deadline for appeal of a purported legal error. On the excusable neglect issue, the Sixth Circuit simply disagreed. Sallie Mae said the office that the summons was mailed to was in the process of moving, with only one employee present; it argued that the resulting delays and chaos amount to excusable neglect. However, the court noted that Sallie Mae offered no evidence that the organization took steps to safeguard important mail and the lost notice appeared to be the result of its own negligence. On the notice issue, the court said, Sallie Mae was entitled to no further notice in any case because of its failure to respond. Finally, the Sixth Circuit found that service was not improper just because the executive named did not work at that office; Gourlay had an obligation to serve the principal office, and she did.

I am pleased to see a win in a case involving a company that refused to follow the rules. In general, this kind of default judgment is more often won against individual defendants, who miss notices because they don’t have the resources of a large organization like Sallie Mae. (In rare cases — though less rare in debt collection lawsuits — the notice is actually served incorrectly.) This ruling helps establish that the same rules apply even when the losing party is powerful and can afford many lawyers. It’s also, of course, a win for Gourlay, who may be able to clear the encumbrance of her student loans because of this mistake.

As a Sacramento Bankruptcy Attorney I routinely work with people who are suffering from heavy student loan debts and have limited options for clearing it. Based in downtown Sacramento I represent clients across the entire metropolitan area who are ready to explore bankruptcy as an option for clearing debt and making a fresh start. To speak to us about your case and your options, send us a message through our website or call 1-916-361-6028.