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What provision of the Bankruptcy Code applies to student loans?
I believe that Federal Guarantee loans are covered by 523(a)(8)(A), while the private loans are under 523(a)(8)(B). (Make sure to confirm this out before using it as an argument.)
Does Actual Money need to Exchange Hands?
Institute of Imaginal Studies v. Christoff (In re Christoff) 9th Cir. BAP No. NC-14-1336-PaJuTa (3/27/15) Debtor did not receive funds from for-profit school, instead received tuition credit. In BAPCPA Congress made the changes to § 523(a)(8) by setting off the “obligation to repay funds received” language from the other provisions of § 523(a)(8) in a new subsection §523(a)(8)(A)(ii). We agree with the bankruptcy court, that in restructuring the discharge exception in this fashion, Congress created “a separate category delinked from the phrases ‘educational benefit or loan’ in § 523(a)(8)(A)(i) and ‘any other educational loan’ in § 523(a)(8)(B).” In re Christoff, 510 B.R. at 882. Put another way, “new” § 523(a)(8)(A)(ii), now standing alone, excepts from discharge only those debts that arise from “an obligation to repay funds (emphasis added) received as an educational benefit,” and must therefore be read as a separate exception to discharge as compared to that provided in § 523(a)(8)(A)(i) for a debt for an “educational overpayment or loan” made by a governmental unit or nonprofit institution or, in § 523(a)(8)(B), for a “qualified education loan.”Simply put, because Debtor did not actually receive any funds, Meridian’s debt is not excepted from discharge under § 523(a)(8)(A)(ii). .
Hedlund v. The Educational Resources (No. 12-35258, D.C. No. 6:11-cv-6281- AA)(9th Cir, 3-2013) Partial discharge of student loans. Underemployed, attempts to pay loans. The bankruptcy court did not err in granting a partial discharge of the debtor’s student loans under 11 U.S.C. section 523(a)(8), and the district court’s judgment holding otherwise is reversed and remanded, where: 1) the district court erred by reviewing the bankruptcy court’s good faith finding de novo, rather than for clear error; and 2) the bankruptcy court’s finding of good faith was not clearly erroneous. Read more…
In Krieger v. Educ. Credit Mgmt. Corp., 2013 U.S. App. LEXIS 7202 (7th Cir. Apr. 10, 2013), the court of appeals examined the facts and circumstances related to a $25,000 student loan obligation owed by Ms. Krieger, a 53-year-old woman, and concluded that the bankruptcy court did not err when it determined that Krieger qualified for a hardship discharge of her student loan.In arriving at its conclusion, the court of appeals explained that Ms. Krieger “is essentially out of the money economy and living a rural, subsistence life[,]” and her circumstances were unlikely to change at any point in the future.
In re Kashikar (9th Cir. BAP) not qualified education loans (foreign medical school education not transferrable to US medical school). determined to be dischargeable (523 did not apply). Burden on lender to support debt fits under 523 perimeters.
Interest on student loans: Interest continues to accrue on all nondischargeable debt while the bankruptcy is pending because interest is viewed as an integral component of the debt. Because of that, I don’t believe that interest can be modified.Case citations: The Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals has held that post-petition interest on a nondischargeable student loan is likewise nondischargeable under the Bankruptcy Code. In re Pardee, 218 B.R. 916, 918 (9th Cir. BAP 1998), citing Bruning v. United States, 376 U.S. 358, 84 S. Ct. 906 (1964) (held that “logic and reason” require that post-petition interest on a nondischargeable tax claim is also nondischargeable). This is because “Congress has determined that absent proven undue hardship, student loans are nondischargeable and, thus, pass unaffected through the bankruptcy estate for purposes of the debtor’s liability . . . .” In re Kielisch, 258 F.3d 315, 320-321 (4th Cir. 2001) (emphasis added); see also In re Cousins, 209 F.3d 38, 40 (1st Cir. 2000) (student loans “pass or ride through the bankruptcy unaffected”).
Collection costs, like interest, are also an integral part of a nondischargeable student loan debt. See In re Featherston, 238 B.R. 377, 381 (Bankr. S.D. Ohio 1999) (“reasonable collection costs fall under the exception to discharge for student loan obligations”); see also In re Pantelis, 229 B.R. 716, 720 (Bankr. N.D. Ohio 1998); In re Claxton, 140 B.R. 565, 570-571 (Bankr. N.D. Okla. 1992). As discussed in Featherston, “assessing collection costs to the debtor is not only authorized by statute, it is mandated” by 20 U.S.C. § 1091a. Featherston, 238 B.R. at 382. Moreover, under 34 C.F.R. 682.410(b)(2), the collection costs must be assessed regardless of whether they are provided for within the promissory note. Id.
Student Loans – consumer or non-consumer debt?
There is a split as to whether or not student loans are per se non-consumer debts. Rather, the Courts will look to determine how the money was spent. See In re Stewart, 175 F.3d 796 (10th Cir. 1999); cf. In re Wisher, 222 B.R. 634 (Bankr. D.Colo. 1998) [there was no testimony regarding how the student loan was used, so the Court held it was consumer debt]; In re Vianese, 192 B.R. 61 (Bankr. N.D.N.Y. 1996) [student loan for children=s education is a consumer debt]; In re Rucker, 454. B.R. 554 (Bankr. M.D. Ga. 2011). In In re Stewart, 175 F.3d 796 (10th Cir. 1999), the Tenth Circuit looked to the evidentiary record and determined that a substantial portion of student loans were used for family expenses as opposed to tuition, books or other direct educational expense
Can you discriminate by paying student loans in a separate class in chapter 13?
There is a conflict between § 1322(b)(1) and (b)(5) which permits payment outside the plan of those debts that exceed the term of the plan. This should apply to student loans. But, the majority of the courts seem to state that it would impose and unfair discrimination if the plan provides that student loans are paid outside the plan. The statutory language remains confusing at best and challenges bankruptcy judges with this extremely awkward analysis. Most court’s excuse is that Congress could provide a clearer path by explaining the interplay between §1322(b)(1) and (5) and expressly stating the conditions that allow a chapter 13 debtor to provide preferential plan treatment to student loan obligations.
Student Loans – treated as separate class in 13:
In re Engen, Case No. 15-20184 (Bankruptcy Court, Dist of Kansas 12/16). The Debtors propose a plan in which student loan creditors are paid as a separate class before other general unsecured creditors. The Court’s reference to “separate classification” includes this favorable treatment. The Court, having reviewed the pleadings and counsels’ arguments, overrules the Trustee’s objection. Debtors’ proposed plan satisfies § 1322(b)(1) because Debtors’ separate classification and favored treatment of student loans does not discriminate unfairly, and the student loan claims are substantially similar.
Can a private collection agency purportedly acting for USA Funds Inc, issue an order of withholding (without court proceedings) on a student loan debt? USA Funds is a guarantor on the student loan debt. Congress gave guaranty agencies the authority to administratively issue orders to defaulted borrowers’ employers requiring them to withhold up to fifteen percent (15%) of the borrower’s disposable income. See 20 U.S.C. § 1095a. This section explicitly preempts state laws and sets forth procedures for providing students with due process, including prior notice of the agency’s intent to withhold, a hearing if requested, and the issuance of a Withholding Order. See 20 U.S.C. § 1095a(a), (b); 34 C.F.R. § 682.410(b)(9). This section also provides that guaranty agencies may sue employers who do not deduct and pay over as directed in the Withholding Order. See 20 U.S.C. § 1095(a)(6); 34 C.F.R. § 682.410(b)(9)(i)(F).
In re Sanborn, (Bkrtcy.D.Mass.) July 11, 2010: Discharge – Single mother suffering from chronic fatigue syndrome was not entitled to “undue hardship” discharge of student loans. Neither a Chapter 7 debtor’s medically diagnosed chronic fatigue syndrome/myalgic encephalomyelitis (CFS/ME), which at present prevented her from working and limited her to monthly income of $1,211 in public assistance benefits, nor the fact that she was a single mother charged with the care of a young child entitled the debtor to an “undue hardship” discharge of her $27,674 in student loan debt. Even the debtor’s treating physician acknowledged that the debtor’s present inability to work would wax and wane, and might perhaps be controlled through the use of drugs that the debtor had declined to take out of concern for the possible side effects. The debtor had obtained a certificate in medical assistance, that qualified her for lucrative employment in a variety of medical settings, and her child would not need as much care as he grew older. Finally, repayment options, such as the income contingent repayment plan (ICRP), provided the debtor with the flexibility needed to deal with what would likely be her changing financial circumstance.
United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367 (2010) (3/23/10). Supreme Court Refuses to Void Confirmation of Plan Discharging Student Loan
In that case Espinosa (9th Cir), a chapter 13 debtor, sought to discharge the accrued interest on his student loan while paying the principle through the plan. He did not initiate an adversary proceeding to determine undue hardship, but included the student loan in his plan. Although the student loan creditor received actual notice of the plan, it did not object to the partial payment. The bankruptcy court confirmed the plan, the debtor complied with it, and the debtor was discharged in 1997. Several years later, USAF attempted to collect the unpaid interest on the loan. Espinosa sought to have the bankruptcy court enforce the discharge and USAF counterclaimed with a motion to void confirmation of the plan under Fed. R. Civ. P. 60(b)(4).
The Supreme Court found that Rule 60(b) relieves a party of a final judgment only in the rare circumstance that the “judgment is premised either on a certain type of jurisdictional error or on a violation of due process that deprives a party of notice or the opportunity to be heard.” The Court began its analysis with the finding that the statutory requirements of undue hardship and the initiation of an adversary proceeding are not jurisdictional. The issue then, was whether USAF received adequate notice to satisfy due process. The Court found that the existence of actual notice, albeit not the type of notice proscribed by the bankruptcy rules, was sufficient to satisfy due process.
The Court addressed USAF and the Amicus, U.S. government’s, argument that the bankruptcy court’s order is void because it went beyond the court’s power. Although the Court found the failure to comply with §§ 523(a)(8) and 1328(a) before confirming the plan was “legal error,” that error did not rise to the level necessary to void a final judgment. This was especially so as the creditor had actual notice and was not permitted to “sleep on its rights.”
The Court disagreed with the aspect of the Ninth Circuit’s decision, however, insofar as it held that a bankruptcy court could confirm a plan which would discharge a student loan without an adversary proceeding so long as the creditor did not object.
In re Harding, 423 B.R. 568 (Bankr. S.D. Fla. 2010). It does not allow different classification of the nonpriority student loan, but it issues an injunction against penalties.
In the Matter of: Coleman, No. 06-16477 U.S. 9th Circuit Court of Appeals, August 01, 2008 “[U]ndue hardship” determinations, whereby bankruptcy courts decide whether student loans qualify for discharge, can be ripe in a Chapter 13 case substantially in advance of plan completion. Since graduating from college, Coleman has been irregularly employed as a substitute teacher and art teacher, and was recently laid off in March of 2005. Just under a year after the plan was confirmed, Coleman sought a determination that it would constitute an undue hardship under 11 U.S.C. § 523(a)(8) for her to repay her student loans, and that her student loans should therefore not be excepted from discharge. Educational Credit moved to dismiss for lack of subject matter jurisdiction on ripeness grounds. The bankruptcy court denied the motion, In re Coleman, 333 B.R. 841 (Bankr. N.D. Cal. 2005), and the district court affirmed the decision of the bankruptcy court. We affirm.
WARNING: PRE BAPCPA:
Does Actual Money need to Exchange Hands?
In McKay v. Ingleson, 558 F.3d 888, 889 (9th Cir. 2009), (deferred payment of the debtor’s tuition and costs of other “educational services”. A late fee would be assessed if default in payments. McKay filed for bankruptcy relief; University sued in state court to recover debt. McKay filed an adversary claiming violation of the discharge injunction of § 524(a). Bankruptcy court and district court concluded no violation of the discharge injunction because debt excepted from discharge under § 523(a)(8). The Ninth Circuit affirmed, reasoning that the agreement between the parties was a nondischargeable “loan” under § 523(a)(8), and that it did not matter that no actual money had changed hands between the parties under their arrangement. Id. at 890. In explaining its decision, the court cited to In re Johnson, 218 B.R. 449 (8th Cir. BAP 1998). The court also cited to the BAP’s opinion in In re Hawkins for the proposition that the amount of the loan must be based on the amount of benefit the debtor received; the court concluded that the “loan” in McKay complied with that requirement. Id. at 891.
Educ. Credit Mgmt. Corp. v. Mason (09/28/06 – No. 04-35999) (9th Cir.Ct.App)
Partial discharge of government-insured student loans is reversed where the debtor had not made a good effort to pay back the loans since he had not maximized his income or made adequate efforts to obtain full-time employment.
Educ. Credit Mgmt. Corp. v. Nys, No. 04-16007 (9th Cir. April 26, 2006)
A bankruptcy panel’s reversal of a ruling against a creditor on her adversary complaint in bankruptcy court to have her student loans discharged is affirmed where the bankruptcy court erred in requiring the debtor to show exceptional circumstances beyond the inability to pay in the present and a likely inability to pay in the future. “Has the Debtor shown that her inability to pay will likely persist throughout a substantial portion of her loans’ repayment period?” [(1)] Serious mental or physical disability of the debtor or the debtor’s dependents which prevents employment or advancement; [(2)] The debtor’s obligations to care for dependents; [(3)] Lack of, or severely limited education; [(4)] Poor quality of education; [(5)] Lack of usable or marketable job skills; [(6)] Underemployment; [(7)] Maximized income potential in the chosen educational field, and no other more lucrative job skills; [(8)] Limited number of years remaining in [the debtor’s] work life to allow payment of the loan; [(9)] Age or other factors that prevent retraining or relocation as a means for payment of the loan; [(10)] Lack of assets, whether or not exempt, which could be used to pay the loan; [(11)] Potentially increasing expenses that outweigh any potential appreciation in the value of the debtor’s assets and/or likely increases in the debtor’s income; [(12)] Lack of better financial options elsewhere.
Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner), 46 B.R. 752, 753- 55 (Bankr. S.D.N.Y. 1985), The district court had thoroughly analyzed the limited legislative history pertaining to the “undue hardship” requirement.
Saxman v. Educ. Credit Mgmt. Corp., No. 01-35620 (9th Cir. April 14, 2003) Bankruptcy courts may partially discharge an educational loan pursuant to their equitable authority under 11 U.S.C. section 105(a).
In re Chambers (11/04/03 – No. 03-1557) (7th Cir) In a Chapter 7 declaratory judgment action, summary judgment to plaintiff is affirmed where plaintiff’s unpaid balance on a student account does not meet the definition of an educational loan under section 523(a)(8) and was therefore properly discharged.
“Accordingly, applying this standard, the bankruptcy court found no evidence of intent by either party to enter into a loan arrangement; rather, the debt arose from Ms. Chambers’ failure to pay the tuition and expenses when due.”