Generally, pursuant to Section 523(a)(8) of the Bankruptcy Code student loans are not dischargeable in bankruptcy, unless the debtor is facing truly remarkable circumstances. However, unpaid college tuition is not treated the same way and can be discharged in bankruptcy.
In a recent case, D’Youville College v. Girdlestone (AP 14-1018 W.D.N.Y. 2015), Bankruptcy Judge Carl L. Bucki held that unpaid college tuition is treated differently than unpaid student loans and that the changes in the bankruptcy code in 2005 did not alter the results of the earlier Second Circuit cases. In D’Youville, the debtor attended the college only for a semester and had agreed to pay tuition but did not sign a promissory note.
In Girdlestone, Judge Bucki followed the holding in Cazenovia College v. Renshaw (In re Renshaw), 222 F.3d 82 (2d Cir. 2000), which held that the mere obligation to pay tuition does not constitute a loan that is non-dischargeable under the Bankruptcy Code.
D’Youville College argued that under the amendments to 11 U.S.C. § 523(a)(8) that Congress adopted in 2005, unpaid tuition should be treated the same was as student loans. In 2005 the Bankruptcy Code provisions related to student loans were changed, and even private student loans, not guaranteed by the government or provided by a school receiving government funding, were no longer dischargeable in bankruptcy. Section 523(a)(8)(B) of the Bankruptcy Code now 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.” According to Internal Revenue Code §221(d)(1), a “qualified education loan” means “any indebtedness” that a taxpayer incurs to pay certain qualified higher education expenses.
Judge Bucki held that “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.” Further, according to Cazenovia College, “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. Based on the above, Judge Bucki held that because Cazenovia College would deny this status to the claim of D’Youville College, D’Youville’s claim is not excepted from discharge under 11 U.S.C. § 523(a)(8).
Since it is very difficult to discharge student loans, the above decision represents a rare positive result for the debtor. However, most college graduates do not deal with the same issues because most colleges require payment before students can graduate and a significant number of students take out student loans as opposed to owing money directly to their school.
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