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Chapter 7 Bankruptcy And Student Loans

Posted: April 26, 2012

Learn Why Kentucky Bankruptcy Court Rules Debtor's Student Loans Should Be Discharged

Kristin E. Gourlay filed for Chapter 7 bankruptcy in Kentucky. Her bankruptcy attorney filed an adversary complaint in the bankruptcy case requesting that the student loan debt to Sallie Mae, Inc. be discharged pursuant to 11 U.S.C. 523(a)(8). Sallie Mae, Inc. never filed an answer to the complaint and Debtor's attorney filed for a default judgment against Debtor.

Sallie Mae filed a motion to set aside the default judgment under the legal theory that they did not file their answer as a result of excusable neglect. The motion to set aside the judgment was denied by the bankruptcy court and Sallie Mae appealed the decision to the Bankruptcy Appellate Panel Of The Sixth Circuit. Under the Federal Rules of Civil Procedure which were adopted by the bankruptcy act, a final order may be reviewedunder Federal Rule of Civil Procedure 60(b) for an abuse of discretion.

As the Court pointed out, an "abuse of discretion will be found where the reviewing court has a definite and firm conviction that the court below  committed a clear error of judgment... The question is not howe the reviewing court would have ruled, but rather would a reasonable person agree with the bankruptcy court's decision; if reasonable persons could differ as to this issue, there is no abuse of discretion."

In this case, Debtor instituted her adversary proceeding against Sallie Mae on May 19, 2011. Debtor owed Sallie Mae aproximately $25,495.06. On May 23, 2011 the bankruptcy court issued the summons, which Debtor's bankruptcy attorney mailed to Sallie Mae on June 6, 2011. On June 8, 2011, "S. Williams,"  who Sallie Mae believes is a part-time employee named Steven Williams, signed the certified mail receipt for the summons and complaint. On June 8, 2011, Debtor filed an affidavit of service attesting that the summons and complaint, and order for trial were send by certified mail to John (Jack) F. Rmondi, President and Chief Operating Officer, Salled Mae, 1261 Bluemont Way, Reston, Virginia 20190-5684.

The judgment of default was entered against Sallie Mae  on July 8, 2011. On August 4, 2011 the bankruptcy court denied Sallie Mae's motion to set aside the default judgment on the basis that it found the complaint was properly served and that Sallie Mae's internal processing breakdown is insufficient to overcome the requirments of Rule 60b). The bankruptcy court further noted that "[i]t's not excusable neglect and the defendant has not shown why it's not culpable for having not responded to the complaint properly served."

In ruling against Sallie Mae, the appellate court indicated that the standard for setting aside a default judgment was much higher than simply setting aside a default. More particularly, as the court noted, [o]nce a default judgment has been entered, as it was here, the bankruptcy court's discretion to set aside the judgment is 'circumscribed by public policy favoring finality of judgments and termination of litigation.

Sallie Mae argued that it's failure to file an answer was not due to culpable conduct but rather excusable neglect. However, the Bankruptcy Appellate Panel was unpersuaded and pointed out that Sallie Mae could not prove excusable neglect under Rule 60(b)(1) a motion to set aside a default judgment have required  a showing that minimal internal safeguards designed to make sure that process reaches the appropriate personnel and action is taken.

For these reasons, the Appellate Panel ruled in favor of Debtor. If you have questions about Chapter 7 bankruptcy in Kentucky, it is strongly recommended that you seek a bankruptcy attorney in Kentucky.