442 B.R. 550
Bankr. S.D. Tex.2010Background
- Debtor borrowed three PLUS loans for her daughter's education totaling about $18,500 by 2005.
- In Sept 2005 Wells Fargo invited consolidation into a single loan; Debtor signed and allegedly sent back forms, though receipt is disputed.
- Debtor filed a voluntary Chapter 7 petition on Oct 14, 2005 and did not seek discharge of the student loan at that time.
- On Dec 8, 2005 Wells Fargo informed Debtor it was canceling pending disbursements and referenced no consolidation; later, on Apr 27, 2006, Debtor signed FFELP consolidation documents.
- Court credits Debtor’s testimony that she did not apply post-petition for consolidation; the consolidation was a bookkeeping entry that merged the pre-petition loans into one loan, with no new money advanced.
- The consolidated loan was assigned to ECMC after default; Debtor’s income and expenses suggest she cannot pay and would incur undue hardship.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does §524(c) apply to the consolidated loan? | Smith argues consolidation is a pre-petition agreement subject to §524(c). | ECMC contends the consolidation is a post-petition new loan not subject to discharge, or a reaffirmation. | §524(c) applies if the loan is dischargeable; consolidation here is a pre-petition debt treated as a bookkeeping entry, not a true new loan; §524(c) applies. |
| Is the consolidation a new loan that cannot be discharged? | Consolidation is a continuation of pre-petition debt, not a new loan. | Consolidation creates a new post-petition debt not dischargeable. | Consolidation is not a true new loan; it is a bookkeeping entry that does not create a new debt; thus not automatically nondischargeable. |
| Are the pre-petition loans dischargeable under §523(a)(8) undue hardship? | Undue hardship applies due to debtor’s income, dependents, and limited prospects. | Debt should be dischargeable only if hardship is proven under Brunner factors; arguments contested. | The Court finds repayment would impose undue hardship; the loans are dischargeable under §523(a)(8). |
| Can a debtor reopen or re-evaluate dischargeability after a discharge? | Not necessary; dischargeability determined at or before discharge. | Post-discharge reevaluation is not permitted. | Dischargeability can be determined based on changed circumstances and may be revisited; no deadline bars subsequent §523(a)(8) relief. |
Key Cases Cited
- In re Clarke, 266 B.R. 301 (Bankr. E.D. Pa. 2001) (addresses consolidation as potential nondischargeability under Higher Education Act)
- In re Sobh, 61 B.R. 576 (E.D. Mich. 1986) (reopen bankruptcy to seek dischargeability based on post-discharge changes)
- In re Walker, 427 B.R. 471 (BAP Minn. 2010) (post-discharge change in circumstances for §523(a)(8) relief)
- In re Roberson, 999 F.2d 1132 (7th Cir. 1993) (post-discharge reconsideration of student loan dischargeability)
- In re Brunner, 831 F.2d 395 (2d Cir. 1987) (Brunner test for undue hardship under §523(a)(8))