I confess when we filed this case, I was hoping Wells Fargo would quickly see that we were right, acknowledge the mistake, and fix it. And naively, I thought they might be willing to sit down and fix the problem for all their customers. Everybody makes mistakes, and this could have been a real opportunity for Wells to prove that they’ve changed their business culture. But now I fear that Wells Fargo has no intention of changing its culture or business practices despite their public protestations to the contrary over the last year. They have dug in their heels on this issue, and seem intent to keep doing what they’re doing, which is plainly a violation of the bankruptcy laws.
In 2007 Ryan, the consumer, filed for bankruptcy. Following the bankruptcy Wells Fargo Bank sued Ryan and obtained a state court judgment to collect on the debt. Ryan had attended Capella University, a for-profit school.
Attorney Austin Smith jumped into the fray as part of a team and last year he reopened the case and sued that the debt had in fact been discharged and sought punitive damages for discharge violations.
And while the Court said Section 523(a)(8) is self-executing, a student loan debt is non-dischargeable absent a determination
In this case, Educational Financial Services, a division of Wells Fargo Bank, tried to make the argument the loan was not actually discharged in the 2007 bankruptcy.
When Wells Fargo sued Ryan in State Court to collect on the student loan debt included in Ryan’s bankruptcy they made no mention of Ryan’s previous bankruptcy and discharge. The consumer felt subsequently pressured into entering a consent judgment over the debt in 2008 and made monthly payments of $150 on the loan for the next seven years.
The Judge ruled that even though Ryan had previously repaid the debt through the State Court judgment he was not prevented from reopening his bankruptcy and filing an adversary proceeding to rule on the discharge of his non-protected private student loan debt
Finally fed up Ryan found legal help to reopen his previous bankruptcy case to commence an adversary proceeding and have this matter dealt with once and for all.
The valid point raised by Ryan, the Plaintiff, was that the loans from Wells Fargo were discharged by operation of law on , because the loans were not a student debt protected by any subsection of Section 523(a)(8). More on this technical issue can be found here.
The issue at hand was if Ryan’s discharge had been violated because the loans were not student loans under Section 523(a)(8).
The Court also said, However, the self-executing nature of Section 523(a)(8) is premised on the debt actually being one for a student loan, a determination that was not previously made by this Court or the State Court which had concurrent jurisdiction to do so. Source
This is why it is so important for anyone who includes student loans in a bankruptcy to pursue an adversary proceeding to get a ruling on the dischargeability of the loans. This key step is one that often gets overlooked.
Judge John Gregg ruled Wells Fargo could not easily have the Plaintiff’s complaint dismissed and the issue would have to proceed. As you can imagine, Wells Fargo has appealed the Judge’s ruling and hopes to get a different answer on appeal. Source
In the appeal Wells Fargo raises the point Ryan’s loans should not be discharged because he obtained funds from Wells Fargo and the government in excess of the cost of attendance. But shouldn’t that be the job of Wells Fargo to determine? Because if private student loans are extended for more than the cost of attendance, all or part of the loans can be discharged thru bankruptcy.
Wells Fargo is most likely in a hurry to get this matter resolved in their favor because if they are found to have pursued the alleged discharged private student loan debt they could be facing a precedent and financial consequences.
Ryan’s amended complaint they are trying to get tossed out summarizes the issue at the heart of this case. It says, Not all student loans are presumptively non-dischargeable in bankruptcy. In fact, the term student loan appears nowhere in section 523(a)(8). Instead, section 523(a)(8) makes certain educational debts presumptively non-dischargeable, including government issued educational loans, defaulted conditional government grants and scholarships, certain loans from non-profit institutions, and private education loans that are qualified education loans under the tax code. Section 523(a)(8) does not except from discharge a host of other types of traditional private, credit-based loans couched as student loans by for-profit lenders, including loans for K-12 programs, loans made to students at unaccredited trade schools, loans made for alcohol and drug rehab, and loans made in excess of the cost of attendance. This is reinforced by the plain language of the discharge order, which states that debts for most student loans are non-dischargeable. If debts for all student loans are presumptively non-dischargeable, then more than 10 million discharge orders have been issued with an erroneous legal conclusion since 2005. Source
The complaint also states, Given Wells Fargo’s actual and constructive knowledge of the timing of the Plaintiff’s loans, the cost of attendance at Capella University, and the nature of the Loans it extended to the Plaintiff, Wells Fargo knew or should have known that the Loans were discharged in the Plaintiff’s bankruptcy.