Bankruptcy Courts & Non-dischargeability of Student Loans

Bankruptcy Courts & Non-dischargeability of Student Loans

Bankruptcy Courts begin to chisel away on the non-dischargeability of student loans:

Under the Bankruptcy Code, Congress created sure exceptions to discharge of debt.  

Student loans are particularly excepted from discharge beneath Sections 523(a)(8)(A)(ii) and 523(a)(8)(B):

“(a) A discharge beneath part 727,1141,1228(a),1228(b), or1328(b)of this title doesn’t discharge a person debtor from any debt—

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

(A)(i) an academic profit over-payment or loan made, insured, or assured by a governmental unit, or made beneath any program funded in entire or partly by a governmental unit or nonprofit establishment; or

(ii) an obligation to repay funds obtained as an academic profit, scholarship, or stipend; or

(B) some other academic loan that could be a certified schooling loan, as outlined in part 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who’s a person;

Most Debtors in Bankruptcy try to discharge their student loans beneath the “undue hardship” doctrine.  The seminal undue hardship case is the 1987 case of Brunner v. New York State Higher Education Services Corp.,  831 F.2nd 395,  Bankr. L. Rep. P 72,025 (2nd Cir. 1987).  However, the Brunner court docket requires a three-part displaying that (1) the debtor can’t preserve a minimal way of life if compelled to repay the loans; (2) the debtor’s incapacity is prone to persist for a big interval, and (3) that the debtor has made good religion efforts to repay the loan.

In choice after choice, the Bankruptcy Courts have outlined undue hardship akin to whole incapacity or lack of ability to work at any job by any means and that nonetheless, the debtor has made good religion efforts to repay the loans.

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However, in a current Bankruptcy case of In Re Tucker, 2016 BL 364391, Bankr. WDNY (11-1-16), the Debtor’s attorneys took a special strategy to the student loan exception.

The In Re Tucker attorneys argued, and the court docket agreed, that  as a result of the student debt in query was not an “education benefit over-payment or loan”, the student loan exception to discharge beneath Bankruptcy Code § 523(a)(8)(A)(ii) wouldn’t apply.

Although the debtor needed to deliver an Adversary Proceeding inside her chapter case and file a Motion for Summary Judgment, Judge Michael Kaplan dominated that the particular settlement executed by the student and college on this case was not a “student loan” throughout the that means of the Bankruptcy Code.

Cazenovia College v. Renshaw, 222 F.3d 82, 87 (2nd Cir. 2000), citing a 1914 opinion by the Second Circuit, defines a student loan as a “contract, whereby one party transfers a defined quantity of money, goods or services to the other, and the other party agrees to pay for the sum of money or transferred goods at a later date”. Id at 87.

The Debtor in In Re Tucker argued that she executed a “Financial Agreement” by D’Youville College that was just like a line of credit:  There was no certain quantity due, the settlement offered for an adjustment to be made for monetary assist that may be obtained at a later time, and the settlement offered for a month-to-month curiosity provision.

The In Re Tucker Bankruptcy Court agreed that the Financial Agreement entered into between the student and the events was merely a promise to pay for tuition charges and different registration prices (no matter they turn into) at some unspecified future time.  Financial assist disbursements can be utilized to the Financial Agreement.  However, no “funds” have been ever “received” by the debtor.  

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Therefore, the Financial Agreement entered into between the student and the college was a dischargeable debt and never a student loan beneath 523(a)(8)(A) or (B) of the Bankruptcy Code.

Interesting Study of Student Debtors:

Based upon a current examine, Bankruptcy Court judges have truly granted student loan discharges to just about 40% of those that utilized for one.  At the identical time, solely .1% of student debtors who’ve filed for chapter even try to discharge their student loans.  Therefore, one could attain the conclusion that the student loan discharge in chapter could also be uncommon solely as a result of not sufficient debtors are submitting for it.

This article was written by Attorney Kolber for the Rockland County Bar Association.