Bankruptcy Courts start to chisel away at the non-dischargeability of student loans:

Bankruptcy Courts start to chisel away at the non-dischargeability of student loans:

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

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

“(a) A discharge under section727,1141,1228(a),1228(b), or1328(b)of this title does not discharge an individual debtor from any debt—

(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;

Most Debtors in Bankruptcy attempt to discharge their student loans under 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.2d 395,  Bankr. L. Rep. P 72,025 (2d Cir. 1987).  However, the Brunner court requires a three-part showing that (1) the debtor cannot maintain a minimal standard of living if forced to repay the loans; (2) the debtor’s disability is likely to persist for a significant period, and (3) that the debtor has made good faith efforts to repay the loan.

In decision after decision, the Bankruptcy Courts have defined undue hardship akin to total disability or inability to work at any job whatsoever and that nonetheless, the debtor has made good faith efforts to repay the loans.

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

The In Re Tucker attorneys argued, and the court agreed, that  because the student debt in question was not an “education benefit overpayment or loan”, the student loan exception to discharge under Bankruptcy Code § 523(a)(8)(A)(ii) would not apply.

Although the debtor had to bring an Adversary Proceeding within her bankruptcy case and file a Motion for Summary Judgment, Judge Michael Kaplan ruled that the specific agreement executed by the student and school in this case was not a “student loan” within the meaning of the Bankruptcy Code.

Cazenovia College v. Renshaw, 222 F.3d 82, 87 (2d 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 similar to a line of credit:  There was no specific amount due, the agreement provided for an adjustment to be made for financial aid that would be received at a later time, and the agreement provided for a monthly interest provision.

The In Re Tucker Bankruptcy Court agreed that the Financial Agreement entered into between the student and the parties was merely a promise to pay for tuition fees and other registration costs (whatever they turn out to be) at some unspecified future time.  Financial aid disbursements would be applied to the Financial Agreement.  However, no “funds” were ever “received” by the debtor.  

Therefore, the Financial Agreement entered into between the student and the school was a dischargeable debt and not a student loan under 523(a)(8)(A) or (B) of the Bankruptcy Code.

Interesting Study of Student Debtors:

Based upon a recent study, Bankruptcy Court judges have actually granted student loan discharges to nearly 40% of those who applied for one.  At the same time, only .1% of student debtors who have filed for bankruptcy even attempt to discharge their student loans.  Therefore, one may reach the conclusion that the student loan discharge in bankruptcy may be rare only because not enough borrowers are filing for it.

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