Have Commercial Lenders Been Misusing The US Bankruptcy Code To Defraud Student Borrowers?

Written by: Lynn E. Swanson, Jones, Swanson, Huddell & Garrison LLC

In a case that could provide the basis for a new understanding of the US Bankruptcy Code as it applies to student loans, a Texas judge has ruled not only that some private student loans are dischargeable in bankruptcy, but that, in fact, lenders may have wrongfully collected loans which have already been discharged.

The case, Evan Brian Crocker, et al. v. Navient Solutions, LLC and Navient Credit Finance Corporation, could give some loan relief to at least an estimated 16,000 student debtors, and possibly more.

Representing the putative class members are the law firms of Jones, Swanson, Huddell & Garrison and Fishman Haygood; as well as The Smith Law Group; the Law Office of Joshua B. Kons; Corral Tran Singh; Ross, Banks, May, Cron & Cavin; and Boies Schiller Flexner.

Misuse of 11 U.S.C. § 523(a)(8)

According to 11 U.S.C. § 523(a)(8), a statutory provision regulating the discharge of private educational loans in bankruptcy, these loans are non-dischargeable only if they are guaranteed by the government or they meet certain criteria:

The loans must be made to eligible, full-time students.

The students must be attending Title IV–accredited schools.

The loans must be made for tuition, room, board, and educational materials.

Commercial lenders, however, often ignore these criteria and treat all educational loans as non-dischargeable. Over the years, these lenders have misled thousands of student borrowers into thinking that they were legally barred from discharging such student debt in bankruptcy, when in fact they could have done so. Even worse, commercial lenders have made tens of thousands of student borrowers pay back loans that were already discharged in bankruptcy—loans that, according to the Bankruptcy Code, they need not have repaid.

“A massive effort to defraud student debtors”

The facts of Crocker are typical of a student loan bankruptcy case. Both Mr. Crocker and Mr. Shahbazi took out private loans for non–Title IV programs and schools: Mr. Crocker took out a Bar Exam Study loan from Sallie Mae bank, and Mr. Shahbazi took out a Sallie Mae Career Training loan to pay for expenses at STMC, an unaccredited technical school in Vienna, Virginia. After Sallie Mae reorganized in 2014, Navient became their loan servicer. Both Mr. Crocker and Mr. Shahbazi fell behind in their debt payments and eventually declared bankruptcy and obtained a discharge of their debts. In both cases, according to plaintiffs’ counsel, their private student loans were discharged in bankruptcy courts by operation of law. Nevertheless, Navient subsequently continued to attempt to collect or induce payment on these otherwise discharged debts in violation of court orders and the Bankruptcy Code.

Navient also hired debt collectors who contacted Mr. Crocker and Mr. Shahbazi regularly for repayments. In Mr. Shahbazi’s case, collectors called him multiple times a day and also called his mother-in-law, his brother, and his wife’s employer. Sadly, this was standard collection procedure for Navient. In June 2017, six nonprofit groups complained to the Federal Communications Commission that “Navient has deliberately engaged in a campaign of harassing and abusing consumers through the use of repeated, unconsented-to robocalls, calling consumers’ cell phones hundreds, and—in some cases—thousands of times after being asked to stop.”

Navient represented to Mr. Crocker and Mr. Shahbazi that their loans were non-dischargeable. Navient’s own corporate documents and policies, however, contradict what the company has told Mr. Crocker, Mr. Shahbazi, and potentially thousands of other student borrowers over the years. Further, Navient regularly advises investors that these loans are dischargeable. In a 2014 offering memorandum, for example, Navient advised potential investors that career training loans, the type of loan taken out by Mr. Shahbazi, are in fact “generally dischargeable by a borrower in bankruptcy.”

According to plaintiffs, Navient misled not only Mr. Crocker and Mr. Shahbazi, but at least an estimated 16,000 people “in a massive effort to defraud student debtors and subvert the orderly working of the bankruptcy courts.”

Favorable initial ruling

Last March, Judge David R. Jones, Chief Judge of the US Bankruptcy Court in the Southern District of Texas, denied Navient’s motion for summary judgment in the case. In a six-page ruling, Judge Jones wrote that the Code was “unambiguous” when it specified that nondischargeable student loans had a much narrower scope than Navient sought, and that they “did not include all loans that were in some way used by a debtor for education. If such were the case, would not a loan for a car used by a commuter student to travel to and from school every day be nondischargeable under § 523(a)(8)(A)(ii)? The answer is obvious.”

The judgment has been certified for a direct appeal to the US Court of Appeals for the Fifth Circuit.

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Attached to this email are two photos we’ve used in connection with this story. The first is a photo of Lynn. The second is a photo of the statue “Alma Mater,” which we bought from Shutterstock.