Tag Archives: Discharge

Ninth Circuit Bankruptcy Appellate Panel Affirms Decision That Tuition Credits Are Not Excepted From Discharge


On July 15, 2014, my partner, Kitty J. Lin, wrote an article about tuition credits and a case of first impression since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) in the Ninth Circuit Bankruptcy Court for the Northern District of California regarding whether tuition credits are excepted from discharge or not discharged. On March 27, 2015, the Ninth Circuit Bankruptcy Appellate Panel affirmed bankruptcy court’s ruling that tuition credits are not excepted from discharge, BAP No. NC-14-1336-PaJuTa, and not excepted from discharge pursuant to Section 523(a)(8)(A)(ii). Ms. Christoff received tuition credits from a for-profit education company named Institute of Imaginal Studies dba Meridian University prior to filing for bankruptcy protection. This is a blow to the for-profit educator sector and a little consolation prize for students with tuition credits. Other for-profit colleges have come under fire recently for their lending practices and the job prospects of their students. At least a student with a tuition credit can discharge that part of their debt when filing for bankruptcy protection.

Procedural History

The debtor, Tarra Nichole Christoff, filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code on April 19, 2013, in the Northern District of California, Bankruptcy Case No. 13-10808-DM-7. As part of her petition Ms. Christoff listed a general unsecured debt of around $11,000 owed to Meridian. Meridian proceeded to file an adversary proceeding (lawsuit within the main bankruptcy case) to determine whether the tuition credits and resulting loan from Meridian to Ms. Christoff was excepted from discharge pursuant to Bankruptcy Code Section 523(a)(8)(A)(ii).

Section 523(a)(8)(A)(ii) of the Bankruptcy Code provides:
(a) A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (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—
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend;

After Meridian filed a motion for summary judgment in the adversary proceeding the Bankruptcy Court denied the motion for summary judgment and entered a judgment in favor of Ms. Christoff. The Honorable Dennis Montali starts the memorandum of decision: “In addressing the issue court must consider two powerful competing principles: the need to give the honest debtor a fresh start and the seemingly endless desire of Congress to except more and more student loans from discharge absent undue hardship.” Meridian’s bankruptcy lawyers argued that Ms. Christoff received a loan from Meridian and the loan proceeds went directly to Meridian and Ms. Christoff then received the education. Ms. Christoff’s bankruptcy attorneys argued she never received any funds from Meridian or anyone else. The Honorable Judge Dennis Montali in the adversary proceeding held that no funds were received even though the transaction between Meridian and the Ms. Christoff resulted in loans for repayment of tuition credits to Meridian. Therefore, the tuition creditors are not excepted from discharge. The decision in the adversary case was immediately appealed to the Ninth Circuit Bankruptcy Appellate Panel for review.

Ninth Circuit Bankruptcy Appellant Panel Affirmation of the Bankruptcy Court’s Ruling

Ms. Christoff, the debtor, was awarded $6,000 in financial aid to pay for some of her tuition. She signed a promissory note. She did not actually receive any funds from Meridian though. Instead, what she received was a tuition credit. The terms of the note required her to pay back the funds at $350 per month after she finishes her coursework or she withdraws from Meridian along with 9% interest to be compounded monthly. She received another $5,000 in tuition credit the following year after signing a promissory note with the same terms. She withdrew from Meridian after completing all her coursework and clinical hours but before she completed her dissertation.
In interpreting the funds received requirement in Section 528(a)(8)(A)(ii), the Ninth Circuit Bankruptcy Appellate Panel agreed with the bankruptcy court and held Meridian simply agreed to be paid the tuition later and it did not receive any funds from a third party financing source. The key here is the language in Section 528(a)(8)(A)(ii) that grants exception to discharge for “an obligation to repay funds received.” That means funds received by the plain language of the Bankruptcy Code. The long stand principle is that exceptions to discharge should be confined to those plainly expressed. Hawkins v. Franchise Tax Bd. of Cal., 769 F.3d 662, 666 (9th Cir. 2014) The plain language of this prong of the statute (Section 523(a)(8)) requires that a debtor receive actual funds in order to obtain a nondischargeable educational benefit.” Cazenovia Coll. v. Renshaw (In re Renshaw), 229 B.R. 552, 555 n.5 (2d Cir. BAP 1999), aff’d, 222 F.3d 82 (2d Cir. 2000)) Again, no funds were received so Section 528(a)(8)(A)(ii) did not except from discharge the tuition credits Ms. Christoff received.

Are Substituted Tax Returns Considered a “Filed” Tax Return So That Unpaid Income Tax Can Be Discharged in Bankruptcy?


In order for your tax debt to be dischargeable in bankruptcy you need to meet all these criteria: 1) the taxes need to be due more than three years ago, 2) filed at least two years prior to filing bankruptcy, 3) the taxes need to be assessed more than 240 days (8 months) ago, and 4) no filing of fraudulent returns or willful attempts to evade or defeat a tax. If you meet those 4 requirements, your unpaid income taxes can be dischargeable in your bankruptcy case. Today we are going to focus on Internal Revenue Service policies and whether a substituted tax return filed by a taxing authority on behalf of a taxpayer is considered a “filed” tax return to satisfy number two listed above.

What is a substituted tax return? A substitute for return (“SFR”) is a tax return the Internal Revenue Service (“IRS”) files on your behalf if you fail to do so. The IRS gathers all the information submitted to them (W-2s, 1099s, etc.) and the taxing authority prepares your return on your behalf. Keep in mind that the SFR is most likely not going to include all the deductions, exemptions, and credits that you may be entitled to so the tax assessment may be higher than what you actually owe. The IRS will send you a Notice of Deficiency and provide you with a proposed assessment and give you 90 days to file a return or a petition in Tax Court. If you do not respond the IRS will proceed with the assessment and for all intents and purposes the SFR will be considered a valid return for tax assessment and interest and penalties will accrue. Now just because the IRS filed an SFR for you does not mean that you cannot file your own tax return. In fact it is encouraged that you still file your own return because as indicated previously, the IRS does not take into account all the deductions, credits, and exemptions that you may be entitled to. By filing your own return you can reduce your tax liability if not eliminate it altogether. You may even be due a refund. If you do not file your return within 3 years of the date the return is due you risk losing your refund and your right to claim tax credits. Make sure your bankruptcy attorney or you obtain an account transcript from the IRS to verify your tax history and verify that a SFR was filed on your behalf.

Now that you know what a SFR is the next step is to determine if the SFR acts as a filed tax return if the IRS prepares the SFR. The short answer is a resounding NO! Please see IRS Chief Counsel Notice CC-2010-016 and Internal Revenue Code §6020(b). The SFR does not count as a filed return and therefore if you owe taxes pursuant to the SFR it is not dischargeable in bankruptcy. If you prepare and file your own tax return after a SFR was prepared by the IRS, taxes are assessed and file it with the IRS and meet all the criteria of a dischargeable tax debt, then only the portion of the tax that was not previously assessed would be dischargeable. If you end up owing no taxes or a decrease in taxes owed, those taxes would not be dischargeable.

After the IRS prepares a SFR and assesses taxes owed from the SFR you can still prepare and file your own tax return. Once you file your own tax return and if your unpaid income tax meets all the criteria for the taxes to be dischargeable, only the portion that was not previously assessed from the SFR would be dischargeable. If it turns out that you do not owe as much as the IRS claims, whatever amount remaining owed to the IRS from the taxes assessed by the SFR is not dischargeable.

For example:

Let’s look at an example to help you picture this rule. Let’s say you want to file for Chapter 7 bankruptcy in November 2014 and you ask your bankruptcy lawyer if your taxes are dischargeable. You owe taxes for the 2008 tax year but you never filed a tax return for this year and the IRS filed an SFR on your behalf and assessed the taxes in 2010 and the SFR indicated you owed $15,000 for the 2008 tax year. Even though you meet all the other criteria to have your taxes discharged, the $15,000 is not dischargeable because you did not technically file a return since SFRs do not count as a valid return. Now let’s say you immediately go to a CPA to file the 2008 tax return and you were assessed an additional $5,000. That $5,000 would be dischargeable in bankruptcy once it meets the other discharge rules. If the CPA helps you file the tax return and you end up lowering your tax liability from the $15,000 the IRS assessed from the SFR to only $3,000, your tax liability will only be $3,000. This is good news since you only owe $3,000 rather than $15,000, but the bad news is that the entire $3,000 is not dischargeable no matter how long you wait to file for bankruptcy.

The harsh effect of the SFR should encourage you to file your taxes on time in the event you know you are going to owe income taxes. Not filing a return and the Internal Revenue Service filing a substituted return could make any otherwise dischargeable income tax not dischargeable. So no, substituted tax returns are not considered a “filed” tax return so that unpaid income taxes can be discharged when filing bankruptcy.

What Happens if I Make Payments to a Creditor After Receiving a Discharge in Bankruptcy?


You just received your discharge order from the bankruptcy court indicating your debts are now discharged and your case is closed. Congratulations! You now have a fresh start free from burdensome debts. What do you do now? Some people want to pay back some of their creditors due to a sense of obligation (for example, some people want to pay back their dentist who they have been going to for years and who has never hounded them for payment, or their friends or family members who have loaned them money to get by throughout the years). Whatever the reason, there is no law against voluntarily repaying a debt from post-petition funds (meaning money you obtained from whatever source after you filed your bankruptcy case). Does repaying that debt mean you re-obligated yourself to that debt, essentially reaffirming the debt? The short answer is no. In order to reaffirm a debt you have to follow the strict guidelines outlined in 11 U.S.C. §524(c). See In re Charles Lopez 345 F.3d 701 (2003).

When your experienced bankruptcy attorney files your bankruptcy case and you receive a discharge of your debts your personal obligation to repay that debt is discharged. This applies to even secured debts such as your car or home mortgage. Don’t get me wrong, this does not mean you do not have to repay your car loan or home mortgage to keep the car or home. Since the car loan is a secured debt, if you do not repay the debt your car loan lender can repossess your car. However, given your personal obligation was discharged in the bankruptcy case the car loan lender cannot go after you for any deficiency balance if there are any. If you sign a reaffirmation agreement as part of your bankruptcy, this is essentially a new contract in which you are re-obligating yourself to that debt. If you sign the reaffirmation agreement and then you cannot make payments on that debt the car loan lender can repossess your car and go after you for any deficiency balance.

You filed bankruptcy to get rid of your personal liability to repay your debts. Why would anyone sign any reaffirmation agreement? Unfortunately, in the Ninth Circuit, In re Dumont (581 F. 3d 1104, 9th Cir, 2009) holds that a car loan creditor can repossess your car if you did not sign a reaffirmation agreement. It does not matter even if you are current on the loan – your creditor can still repossess your car. You have essentially 3 different options after you file your bankruptcy case regarding secured debts: 1) surrender the car; 2) redeem the car for the fair market value (meaning you pay your lender a lump sum payment of what the car is worth rather than pay what you owe on the car – this is only good if your car is heavily upside down); and 3) reaffirm the debt. The good bankruptcy lawyer unspoken 4th option to keep the car and continue making payments on it (sometimes called a “ride through”) is no longer available to consumers based on In re Dumont. However, it is still advisable to speak with your car loan lender to see if they are wiling to offer you that option. Most lenders still can offer it. Some lenders, like Ford, will require you sign a reaffirmation agreement in order to keep the car. Keep in mind, you should not and you do not have to reaffirm huge debts like mortgages on your house because you do not know what the future holds. You do not want to be in a situation where you cannot pay your mortgage and your mortgage holder comes after you for the debt in the future.

Once you have finally made a decision to reaffirm the debt, your lender has to follow the strict guidelines of §524(c) to reaffirm the debt. Essentially they have to provide you with full disclosure of what the terms are and the reaffirmation agreement has to be signed completely voluntarily and cannot be an undue hardship for you. Once you sign the reaffirmation agreement the creditor files it with the court. If you sign the reaffirmation agreement without the representation of a bankruptcy lawyer, there is a hearing in front of the judge. This hearing is to protect you and to make sure the creditors are not taking advantage of you. If the judge thinks it is an undue hardship for you to reaffirm the debt he or she can reject the reaffirmation agreement. The judge can also sign off on the reaffirmation agreement if he or she believes it is in your best interest. The reaffirmation agreement has to be filed with the court before the case is closed. Once the case is closed no further reaffirmation agreements can be entered into. Therefore, you do not have to “accidentally” enter into a reaffirmation agreement because it has to follow these guidelines.

Can My EDD Overpayments be Discharged in Bankruptcy?


If you received a notice from the California Employment Development Department (EDD) with a bill attached indicating you owe money to the state, you are not alone. Many Californians are issued overpayment notices. To add insult to injury, there are plenty of instances where the overpayment is not your fault. The EDD may have simply incorrectly calculated the amount to pay you and now they want their money back – with interest and penalties. It does not matter that the overpayment was not your fault; you may still be penalized for it. So what can you do about this overpayment? It depends on the circumstances of your case. EDD overpayments can be discharged in bankruptcy.

There are a few things you can try first before seeking the advice of a bankruptcy attorney to file bankruptcy and discharge the EDD overpayment. You can appeal the overpayment if it is within the window of time in which you may do so. If it is past the time where you can appeal or you lost the appeal and you do not have any other debts and the EDD overpayment is a manageable amount then you can try to negotiate or work out a payment schedule with the EDD.

Alleged EDD overpayments can be discharged in bankruptcy.

Alleged EDD overpayments can be discharged in bankruptcy.

If you have other debts in addition to the overpayment from the EDD you may consider bankruptcy as an option. You should consult with a bankruptcy lawyer regarding your situation as the answer always depends on your specific circumstances. If you qualify for Chapter 7 bankruptcy the EDD overpayments are dischargeable along with your other general unsecured debts. If you choose to file a Chapter 13 bankruptcy the EDD overpayments will be treated the same as your other general unsecured creditors. Depending upon your circumstances you may not be paying anything back to general unsecured creditors and the alleged EDD overpayment will be discharged upon completion of the Chapter 13 plan. The dischargeability of your EDD overpayments are dependent on whether there was fraud involved in the accrual of the overpayment. If there was allegedly fraud involved the discharge of the EDD overpayments can be denied pursuant to 11 U.S.C. §523 if the California Employment Development Department files an adversary proceeding and proves the overpayment was due to fraud.

California’s Unemployment Insurance Code §2736 states that in the absence of fraud, misrepresentation or willful nondisclosure, EDD must mail the overpayment notification to the recipient of the unemployment benefits within 2 years after the beginning of the benefit period where the overpayment was made. If there is fraud involved California’s Code of Civil Procedure §338(d) provides for a three-year statute of limitations. The clock starts when the cause of action is discovered (or should have been discovered) by the aggrieved party (in this case, the EDD), of the facts constituting the fraud or mistake. If the EDD knew, or should have known, about the facts constituting fraud for more than three years and they did nothing about it then they can no longer go after the recipient. Statutes of limitations are set up so that the aggrieved party can pursue their rights in a timely manner. If they sleep on their rights they will lose them. It goes with the saying, “You snooze, you lose.” There are time limits set up because the longer the time passes, the harder it is to remember detailed information that may help or hinder the case, witnesses may no longer be able to remember or may no longer be present to provide testimony and records may be destroyed. Therefore it is imperative to move on your rights as soon as you know you have been wronged.

If it has been more than three years since the alleged overpayment has occurred and the EDD has not charged you with fraud then they will not be able to bring fraud up as an exception to your bankruptcy discharge should you decide to file for bankruptcy. There are several issues you may want to be aware of when discharging your EDD overpayments in bankruptcy. The first issue is the offsetting of your tax refund. If the EDD has placed a lien and forwarded information to the taxing authorities to have your refund withheld to pay back the overpayment, you want to be sure the overpayments are discharged in bankruptcy prior to your filing your tax returns. If you file your tax returns after your bankruptcy case has started but before receiving a discharge your tax refunds may still be withheld to pay the pre-petition debt (your overpayment). Before filing your tax return you should contact the taxing authorities to verify the debt has been discharged. If it has not, or even if there is a question about it, you should apply for an extension to file your taxes.

Another issue is the recoupment of the overpayment. Recoupment is when the EDD withholds your unemployment benefits to pay the overpayment that is discharged through bankruptcy. They can do this only if you are currently collecting unemployment and you try to discharge the overpayment in your bankruptcy case. The recoupment and the overpayment have to arise from the same action. If you are not on unemployment when you file your bankruptcy case and your overpayment is discharged through bankruptcy, the EDD cannot recoup those funds from you when you apply for the benefits in the future since those debts were discharged in your bankruptcy case and trying to collect on it is a discharge violation. This matter is not settled, however, so you should contact a bankruptcy attorney to discuss your situation.

Tuition Credits are Not a Student Loan and Dischargeable When Filing Bankruptcy


You have probably heard over and over that student loans are not dischargeable in bankruptcy unless you can prove that repaying the student loans constitutes an undue hardship for you. That is still the case. 11 U.S.C. 523(8) excepts from discharge (A)(i) an education 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 education benefit, scholarship, or stipend; or (B) any other educational loan that is a qualified education loan, as defined in §221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual. This means if your student loans fall into any of the above categories the debt is not dischargeable in your bankruptcy case and you will still owe the funds after your case is closed unless you can prove undue hardship by filing an adversary proceeding.

Although the statute above may seem daunting there may be hope. In a recent case, In re: Christoff, Bankruptcy Case No. 13-10808DM, Northern District of California (2014), the court held that the debts held by Ms. Christoff were never received by her and therefore are not excepted from discharge by 11 U.S.C. §523(a)(8) and were discharged in her Chapter 7 bankruptcy case. In this case, Ms. Christoff attended the Institute of Imaginal Studies dba Meridian University (“Meridian”). She was awarded $6,000 in financial aid to pay for some of her tuition. She signed a promissory note. She did not actually receive any funds from Meridian though. Instead, what she received was a tuition credit. The terms of the note required her to pay back the funds at $350 per month after she finishes her coursework or she withdraws from Meridian along with 9% interest to be compounded monthly. She received another $5,000 in tuition credit the following year after signing a promissory note with the same terms. She withdrew from Meridian after completing all her coursework and clinical hours but before she completed her dissertation. She filed for Chapter 7 bankruptcy protection in August 2013 and Meridian filed an adversary proceeding to determine that the amount owed to Meridian was nondischargeable under 11 U.S.C. §523(a)(8) as a student loan.

The court in this case thoroughly examined student loan cases throughout the Ninth Circuit and other circuits. What is important to bankruptcy lawyers is what differentiates this current case with all other student loan cases is the fact that Ms. Christoff never received the funds from Meridian nor did Meridian receive funds from any other source. Ms. Christoff received a “credit” towards her education to be paid back at a later time. Both parties agreed that Meridian was not a governmental unit so they did not fit into §523(8)(A)(i). They also agreed that Meridian did not fit into §523(8)(B). Therefore the only avenue to except the debt from discharge is §523(8)(A)(ii). The entire case hinged on whether the funds were received as an education benefit, scholarship or stipend. The court determined that since there were no funds received in Ms. Christoff’s case, the debt did not fit into §523(8)(A)(ii) either and therefore the debt was dischargeable in her bankruptcy case.

What is interesting to note in this case as well is the fact that the court looked to one case, In re Oliver, 499 B.R. 617 (Bankr. S.D. Ind. 2013) where a university withheld a student’s transcript because she did not pay the tuition or related fees. The Oliver court indicated that to be excepted from discharge, the debt must still be a loan. Therefore if you did not borrow money to pay the tuition (i.e: you pay for it yourself without borrowing money from a governmental entity, private student loan company, from the school itself, or from any other third party) the debt does not fit into any of the above exceptions to discharge and is therefore dischargeable in a bankruptcy. This court completely agreed with the Oliver court in their analysis and conclusion. Meridian’s bankruptcy attorney appealed this case on the same day the decision came out so we may or may not have the same result later on. We will follow continue to monitor this case and will report on the outcome of the appeal.