Section 523(a)(8) of the Bankruptcy Code states that student loans are not dischargeable in bankruptcy. In 2000, the Second Circuit Court of Appeals held that unpaid tuition does not constitute a student loan. In a recently released case, Bankruptcy Judge Carl L. Bucki of Buffalo ruled that changes in the bankruptcy code in 2005 did not alter the results of the earlier Second Circuit case.
The opening sentence of the Buffalo case, D'Youville College v. Girdlestone (Western District of New York Adversary Proceeding 14-1018, decision February 10, 2015), summarizes the issue nicely: "In Cazenovia College v. Renshaw (In re Renshaw), 222 F.3d 82 (2d Cir. 2000), the Court of Appeals held that the mere obligation to pay tuition does not constitute a loan that is non-dischargeable under the Bankruptcy Code. The present adversary proceeding now presents the question of whether a different result must follow from the amendments to 11 U.S.C. § 523(a)(8) that Congress adopted in 2005."
The Renshaw case stated that "to constitute a loan there must be (i) a contract, whereby (ii) one party transfers a defined quantity of money, goods, or services, to another, and (iii) the other party agrees to pay for the sum or items transferred at a later date." 222 F.3d at 88. When a student unilaterally does not pay tuition, the student may be indebted to the school, but that indebtedness does not make the transaction a loan.
In 2005 the Bankruptcy Code provisions related to student loans were enlarged, and for the first time private student loans, not guaranteed by the government or provided by a school receiving government funding, were no longer dischargeable in bankruptcy. The new provision, Section 523(a)(8)(B) of the Bankruptcy Code, states that the debtor will not receive a discharge of "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."
Internal Revenue Code Section 221(d)(1) defines a "qualified education loan" to mean "any indebtedness" that a taxpayer incurs to pay certain qualified higher education expenses. But just because the IRS code describes any indebtedness related to education expenses as a "qualified education loan", that does not mean that any indebtedness is a "loan" for bankruptcy purposes.
As Judge Bucki put it, "under the Bankruptcy Code, nondischargeability extends not to any such "qualified education loan," but only to "any other educational loan that is a qualified education loan."" [Emphasis added]
Judge Bucki continued: "Thus, section 523(a)(8)(B) will deny discharge to certain types of educational indebtedness, but only if the obligation can satisfy the prerequisite of being a "loan." Because Cazenovia College v. Renshaw would deny this status to the claim of D'Youville College, the claim is not excepted from discharge under 11 U.S.C. § 523(a)(8)."
Judge Bucki is following a bankruptcy case out of Indiana, In re Oliver, 499 B.R. 716 (Bankr. S.D. Ind. 2013). Courts may not ignore the opening words of 11 U.S.C. § 523(a)(8)(B). Bankruptcy Judge Carr in that case stated "by retaining the phrase 'any other educational loan,' it appears that Congress has not departed from the notion that a 'student loan' excepted from discharge must still be a loan."
My professional friend Attorney Kevin Bambury of the Jeffery Freedman Attorneys office represented the debtor in the Girdlestone case and should be congratulated for vigorously representing his client's interest in this lawsuit.
The dischargeability of student loans is a complicated area in bankruptcy. I have written several blogs on the issue, such as "Overpayment of a Government Tuition Grant is Not Discharged in Bankruptcy" (January 24, 2015); and "("When are Private Student Loans Discharged in Bankruptcy?" (September 21, 2011), which is a rare plain language analysis of the complicated statutory language describing what constitutes a private student loan.
If you are considering filing bankruptcy and would like more information as to how student loans are affected, you may contact me through my website, scribnerbankruptcylaw.com, for a phone consultation, at no charge, of your situation.