As mentioned in an earlier article, student bankruptcy is an ongoing problem for the multitude of student loan programs. 11 U.S.C.Sec 523(a)(8) of the Bankruptcy Code, as you are aware, has made student loans non-dischargeable. In The Matter of Jimmy Clark Taylor and Deborah Carter Taylor and the subsequent appeal Deborah Taylor, Appellee v. United States of America, Department of Education, Appellant, the issue arose as to whether a student loan lender may refuse a student loan based on the applicants prior bankruptcy.
Ms. Taylor filed her complaint in Bankruptcy Court against the Chase Manhattan Bank, N.A. in August of 1997 and later amended the Complaint to include the United States Department of Education (DOE), alleging that they violated 11 U.S.C. sec. 525(c)(1) of the Bankruptcy Code and that, as a result of said violation, Ms. Taylor suffered emotional distress. The relevant section of the Bankruptcy Code states as follows:
A governmental entity that operates a student grant or loan program and a person engaged in a business that includes the making of loans guaranteed or insured under a student loan program may not deny a grant, loan, loan guarantee, or loan insurance to a person that is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act…
Ms. Taylor alleged that the bank had violated the above-mentioned anti-discrimination provision when it denied her Parent Loan for Undergraduate Students (PLUS) application due to a prior bankruptcy. Chase and Taylor entered into a settlement agreement and Chase paid Taylor $12,000.00. DOE went to trial on the matter. The Judge in Bankruptcy Court ruled in favor of Taylor and granted her $12,000.00 in damages and awarded her attorney’s fees in the amount of $31,723.97.
DOE appealed to the U.S. District Court arguing that the Bankruptcy Court had erred when it found for Ms. Taylor and when it awarded damages for emotional distress and awarded her attorneys fees. It should be noted that DOE had issued a Dear Colleague Letter following the enactment of the Bankruptcy Reform Act of 1994, wherein DOE advised that “PLUS applicants, among other applicants, continued to have an adv erse credit history and were thus ineligible for the loans”. It was DOE’s position that the applicant was not discriminated against when her loan application was denied as that denial was based on her adverse credit history and not solely on her prior bankruptcy.
The Appeals Court overturned the Bankruptcy Court decision and found for DOE. It concluded, among other rulings, that the Bankruptcy Court had erred when it found that DOE had failed to justify its legal position. The Appeals Court also concluded the Bankruptcy Court had erred when it awarded damages for emotional distress and awarded attorney’s fees as that decision was unsupported by the record or by prior case law. Most importantly, the Appeals Court reasoned that the lender’s purported discrimination against debtor in refusing to make a PLUS loan and in treating the debtor’s bankruptcy, in the absence of extenuating circumstances, as “adverse credit history” was not equivalent to denial of the student loan based solely on the prior bankruptcy, in violation of the bankruptcy statute.