Although student loans may be made by private lenders, most of them are guaranteed by a state or federal government agency such as the Kentucky Higher Education Assistance Agency (KHEAA) or the U.S. Department of Education. Student loans are bought, sold and transferred just like mortgages and credit card accounts, so the initial lender may not own the debt years down the road. Knowing who owns a student loan debt, and whoguaranteed that debt can be very important, as reflected in a recent ruling by the Sixth Circuit Court of Appeals (Michigan, Kentucky, Ohio, and Tennessee).
First, student loans can be discharged in bankruptcy if you can prove undue hardship. You must file a lawsuit against the lender, but they do not always respond and many courts will grant a “default” judgment which discharges the debt if the lender does not respond. Second, let’s say that your parents guaranteed your student loan. Did you realize your parents are creditors also? They have a potential claim against you for any money they must pay as guarantors – a “contribution” claim. They should be listed as creditors in your bankruptcy case. To effectively discharge a student loan in bankruptcy, you should include both the lender and any guarantor of the loan in a lawsuit asking the Court to discharge the debt.
Thomas Alfes did just that when he sued both SunTrust Bank and the Pennsylvania Higher Education Assistance Agency (PHEAA) in his bankruptcy. PHEAA guaranteed payment of his consolidated student loans to SunTrust. PHEAA later transferred its rights to Educational Credit Management Corporation (ECMC). Alfes initially got a default judgment against SunTrust and PHEAA that his loans were discharged. However, ECMC was able to join the lawsuit and have the judgment against PHEAA set aside. ECMC then obtained a ruling that the debt arising from PHEAA’s guarantee was not discharged.
Several years later, ECMC attempted to collect the student loan. Alfes reopened his bankruptcy and tried to hold them in contempt for their efforts. After the bankruptcy court reopened the case, ECMC filed a new lawsuit against Alfes, asking the bankruptcy court to rule that its rights as guarantor of the loan survived based on the ruling in favor of ECMC years earlier. Alfes argued that the debt was discharged due to the judgment entered years earlier against SunTrust Bank. The bankruptcy court decided that ECMC was right, and that the earlier judgment against SunTrust Bank didn’t affect ECMC’s rights as a guarantor. Instead, the earlier judgment in favor of ECMC prevented Alfes from discharging ECMC’s rights as guarantor. The Sixth Circuit Court of Appeals agreed. The case is Alfes v. Educational Credit Management Corporation, Sixth Circuit Docket No. 11-2159, issued March 12, 2013.
The moral of this story is that you must determine who has rights under any student loan and obtain a judgment against each entity with those rights to avoid collection of the loan, even if it creates an undue hardship.