May 21, 2017

Last week we featured a blog entitled, “What to do with Student loan Debt? The Debate Continues.”  In that blog we discussed an important ruling by the 11th Circuit Court that allowed a debtor to discharge $112,000.00 in student loan debt through her individual bankruptcy.

Under a recent ruling by the 9th Circuit Bankruptcy Appellate Panel (BAP), a debtor may be able to discharge over $70,000.00 in private student loans. 

In July 2014, a debtor filed for Chapter 7 Bankruptcy listing the full student loan amount on Schedule F—general, unsecured debt—of her bankruptcy pleadings.  The debtor received a standard discharge four months later, meaning her student loans would not be included in her discharged debt. 

In April 2015, the debtor filed a timely adversary complaint in order to attempt to discharge her student loan debt.  The student loan creditor responded, denying that the debt was discharged.  In the subsequent litigation, the parties outlined the mutually agreeable facts of the case in a Pre-trial Stipulation:

1) “SMU has never been, and is not now, an ‘eligible educational institution’ as that term is defined under section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088)”

2) SMU “has never been, and is not now, eligible to participate in a program under title IV of the Higher Education Act.”

With these facts agreed upon, the only remaining fact to be litigated was: 

                “Whether or not Plaintiff’s student loans were excepted from discharge under 11 U.S.C. § 523(a)(8)?”

11 U.S.C. § 523

Section 523 of the bankruptcy code is entitled “Exceptions to Discharge.” 

This is the section that outlines what debts are not eligible for discharge through a bankruptcy filing.  This includes, among various exceptions: certain tax debt, domestic support obligations, debt incurred from a debtor’s fraudulent activity, debt incurred within certain time limitations, debt incurred from a willful and malicious injury to another person or property, certain fines/penalties owed to a governmental unit, etc.

Section 523(a)(8) details the exceptions specific to student loan debt.  It reads as follows:

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—

        (A)

                (i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or                  made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

               

                (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

       

        (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the                       Internal Revenue Code of 1986, incurred by a debtor who is an individual;

If you remember, Sections A(i) and B were already covered in the Pre-Trial stipulation in which both parties—the debtor and the student loan creditor—agreed that SMU was not considered an eligible “governmental unit” nor was the loan considered a “qualified education loan.” 

This leaves U.S.C. § 523(a)(8)(A)(ii).

        (A)

                (i) an educational benefit overpayment or loan made,                         insured, or guaranteed by a governmental unit, or                         made under any program funded in whole or in part                         by a governmental unit or nonprofit institution; or

               

                (ii) an obligation to repay funds received as an                 educational benefit, scholarship, or stipend; or

       

        (B) any other educational loan that is a qualified education         loan, as defined in section 221(d)(1) of the Internal Revenue         Code of 1986, incurred by a debtor who is an individual;

Taken from the published Opinion by the 9th Circuit, the debtor argued in her adversary complaint that, “…the statute [(A)(ii)] covers only ‘funds received’ directly by the debtor. Because she did not ‘actually’ or ‘directly’ receive any of the loan proceeds (which were paid directly to SMU), she argued that subsection (A)(ii) was not applicable.”

This argument fell flat as the original ruling made by the underlying bankruptcy court resulted in a judgment in favor of the student loan creditor, taking the stance that “a tuition payment made by a third-party lender to a school on behalf of a debtor creates ‘an obligation to repay funds received as an educational benefit.’”

On appeal, the 9th Circuit BAP did not contest this conclusion, instead, the court looked at a different facet of section (a)(8)(A)(ii): the phrase “educational benefit.”  Citing another 9th Circuit student loan case, Institute of Imaginal Studies v. Christoff (In re Christoff), 527 B.R. 624, 632 (9th Cir. BAP 2015), the BAP held that a “loan” is not an “educational benefit.”

Their conclusion comes from Congress’ decision to separate section (A) into parts (i) and (ii); part (i) using the word loan and part (ii) using “educational benefit,” “scholarship,” and “stipend.”  The 9th Circuit argues this is strategic and deliberate and thus: “We hold that a “loan” is not an “educational benefit” within § 523(a)(8)(A)(ii).”

It was through the analysis of this phrase and section of the bankruptcy code that the 9th Circuit reversed the bankruptcy court’s decision and found that the student loan debt was not excepted from discharge under section (A)(ii).

As student loan bankruptcy litigation continues to develop, the details will likely play a large role in determining whether the debt might be eligible for discharge.  While there is no likelihood that discharge of student loans becomes much easier in the near future, understanding your options is important if considering bankruptcy. If you would like to discuss your options with a Grand Rapids bankruptcy attorney, call us today at 616-364-2100.   If you would like to learn more about this or other bankruptcy related questions, please visit at www.kalawgr.com. We look forward to hearing from you.

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