Tag Archives: Tuition Credits

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

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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—
(A)
(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.

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

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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.