The US Bankruptcy Code And Student Loans:
Constructing The Plain Meaning Of The Bankruptcy Code In Attacking Student Loans
Part II In Series by Jay Weller
Editors Note: In Part One in our Series on Student Loans, the writer offered an Equation in determining whether Student Loans can be Discharged in Bankruptcy. The Equation should properly state:
UNDUE HARDSHIP + (NOT A OR B OR C) = STUDENT LOAN DISCHARGE
For the Second Portion of our analysis of Student Loans, the analyzer now needs to partition the salient portions of the Bankruptcy Code Section 523. The Bankruptcy Attorney, in determining whether a Student Loans can be Discharged in Bankruptcy, should first look at whether the Student Loans creates an Undue Hardship. The term, Undue Hardship, almost necessarily demands interpretation from a Court or Judge because it is such a vague term. Undue Hardship can be interpreted many different ways, depending upon the perspective of the Debtor, Bankruptcy Attorney, Judge, or other analyst.
The Fourth Part in our Series on Student Loans will review actual Bankruptcy Court, District Court and Supreme Court Cases as they addressed the issue of whether a Student Loan can be Discharged in Bankruptcy.
If one however, applies the plain meaning of the Bankruptcy Code, which states the Student Loan must create an UNDUE HARDSHIP FOR THE DEBTOR AND THE DEBTOR’S DEPENDANTS, do this then mean that only a Debtor whom has Dependants may seek a Discharge under the Bankruptcy Code? It is not inconceivable that the intent of Congress was to exclude any Debtors that do not have Dependants from obtaining a Discharge of their Student Loans in Bankruptcy. The State of Florida, for example, has a Head Of Household Exemption, where in most cases, a Creditor cannot garnish the Wages of an Individual who operates as the Head of his or her Household. Could this be the intent of Congress? Without addressing the Court Cases addressing Student Loans in Bankruptcy, I can tell you that it is generally not required that the Debtor have Dependants in order to seek a Discharge of their Student Loans in Bankruptcy.
Referring to our Equation, the Debtor and Bankruptcy Attorney can seek a Discharge of a Student Loan under Section 523 of the Bankruptcy Code if the Student Loan creates an UNDUE HARDSHIP on the Debtor or if A, B, or C does not exists.
No matter what type of Student Loan the Debtor may have, if UNDUE HARDSHIP can be proven, then the Student Loan should properly be Discharged in Bankruptcy.
First, the question becomes, is the Loan an EDUCATIONAL OVERPAYMENT OR LOAN under “A” and under “B” whether it was AN OBLIGATION TO REPAY FUNDS AS AN EDUCATIONAL BENEFIT. In some cases the Bankruptcy Attorney or Debtor may be able to raise cogent arguments that the Debtor did not receive an EDUCATIONAL BENEFIT or that the Loan is not EDUCATIONAL. For example, over the years, this writer, as a Bankruptcy Attorney, has seen numerous Clients who have gone to a computer graphics design “college” where they obtained Student Loans through the school in order to fund their attempt to receive expertise or knowledge in computer graphics (or similar programs offered by the school). I have heard from numerous students who attended this school that one teacher did not even show up for classes for an entire semester, that the curriculum that they were promised was never delivered, and that essentially, they were victims of a scam.
In such a case, the Bankruptcy Attorney can argue that no EDUCATIONAL BENEFIT was received, or that such monies paid do not represent an EDUCATIONAL LOAN.
Additionally, what if the Institution they Debtor attended lost its Accreditation, or did not have the proper Accreditation for the Debtor to work or be employed, pursuant to his earned Degree? It could be argued by the Bankruptcy Attorney or Debtor that in such an instance, the Debtor did not receive an EDUCATIONAL BENEFIT.
What if the funds received by the Student were not used for paying tuition or school books, but rather to fund non educational purposes? Is such a loan for an EDUCATIONAL BENEFIT or EDUCATIONAL? If the Bankruptcy Attorney is able to convince a Bankruptcy Judge or District Judge that the Student Loan is not EDUCATIONAL, or for an EDUCATIONAL BENEFIT, the Student Loan will be properly Discharged in Bankruptcy.
The Final Section of our Equation, “C”, states that any other EDUCATIONAL LOAN THAT IS A QUALIFIED STUDENT LOAN AS DEFINED IN SECTION 221(d)(1) OF THE INTERNAL REVENUE CODE OF 1986… cannot be Discharged in Bankruptcy.
Section 221(d)(1) of the Internal Revenue Code of 1986 States:
The term QUALIFIED EDUCATION LOAN means any indebtedness incurred by the taxpayer solely to pay QUALIFIED HIGHER EDUCATION EXPENSES (capitalization added)-
- Which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,
- Which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, AND
- Which are attributable to education furnished during a period in which the recipient was an eligible student.
Section 221(d)(2) defines QUALIFIED HIGHER EDUCATION EXPENSES as:
….the cost of attendance as defined in section 472 of the Higher Education Act of 1965.
So, now onto the Higher Education Act of 1965, Section 472 which references and defines, the COST OF ATTENDANCE. Cost of Attendance includes tuition and fees normally assessed a student carrying the same academic workload as determined by the institution, and includes costs for rental or purchase of any equipment, materials and supplies as required by all students in the same course of study. Section 472(2) includes an allowance for books, supplies, transportation, and miscellaneous personal expenses, and Section 472(3) includes allowances for room and board.
Section 472 contains different definitions of COST OF ATTENDANCE, depending upon whether the Student is part time, a correspondent Student, or has dependants, but the overall thrust of Section 472 of the Higher Education Act is that virtually any form of expense incurred by a Debtor qualifies as COST OF ATTENDANCE.
Under the Bankruptcy Code, as it pertains to Student Loans, almost any form of Student Loan cannot be Discharged, unless the Bankruptcy Attorney or Debtor is able to proved UNDUE HARDSHIP. In some limited circumstances, according to the plain meaning of the Statute, a clever Bankruptcy Attorney or litigator, can argue that the Debtor’s Loan does not qualify as a Student Loan, as defined in Section 523 of the Bankruptcy Code, but such circumstances are somewhat rare. UNDUE HARDSHIP is the best available remedy for those seeking to Discharge a Student Loan in Bankruptcy.