• Seventh Circuit Rejects Debtor’s Argument that a Student Loan is Dischargeable in Bankruptcy
  • March 7, 2011 | Author: Christine Olson McTigue
  • Law Firm: Hinshaw & Culbertson LLP - Chicago Office
  • The case involved a student/debtor who argued that his student loan was dischargeable in bankruptcy. The debtor had obtained the $3,000 loan from a university/lender. The debtor defaulted on the loan and the lender obtained a judgment against him. The debtor then filed for bankruptcy and argued that his loan was dischargeable because the lender had refunded excess money in the debtor’s student account to his mother.

    The Seventh Circuit found that the loan was nondischargeable under 11 U.S.C. § 532(a)(8). The Court adopted the approach taken by the U.S. Court of Appeals for the Fifth Circuit in In Re: Murphy, 282 F.3d 868 (5th Cir. 2002), that it is the purpose of the loan which determines whether it is educational. This approach aligns with the broader goal of protecting lenders against debtors who divert educational funds toward other uses. The five factors the Court considered were: (1) the lender is a school; (2) the loan was part of a financial aid package; (3) the promissory note was signed while the debtor was a student; (4) the debtor had to be a student to be eligible for the loan; and (5) the loan money was deposited into his student account.

    In addition, the Seventh Circuit held that the bankruptcy court properly awarded the lender its costs and fees incurred in litigating this issue in the bankruptcy court pursuant to the terms of the promissory note, in which the debtor had agreed to pay attorney’s fees necessary for the collection of any amount not paid when due.