• Is Your Tuition Receivable Discharged in Your Debtor's Bankruptcy?
  • March 31, 2014 | Author: Joseph M. McCandlish
  • Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Grove City Office
  • This is not always a simple answer. The answer to whether or not your tuition receivable is discharged in your debtor's bankruptcy may depend on two issues: (1) the factual scenario the student became liable for the tuition debt; and (2) the court jurisdiction where the student filed bankruptcy.

    Typically, the more factors pointing toward a mutual intention for the existence of a loan, the more likely a court will find the loan non-dischargeable. 11 U.S.C. ยง 523(a)(8) generally excepts educational "loans" from discharge in bankruptcy. Although Congress did not define the term "loan" in that statute, many courts across the country have done so with differing results. In a Sixth Circuit Court of Appeals case where a student "signed forms evidencing the amount of her indebtedness before she registered for classes . . . agreeing to pay these sums of money owed for educational expenses after graduation," the court held the credit extensions to be non-dischargeable in bankruptcy.1

    In contrast, a Second Circuit Court of Appeals case ruled in favor of a student and discharged tuition charges, despite a written agreement expressly stating "the above does not reflect financial aid." The Second Circuit Court commented on the Sixth Circuit Court's earlier ruling, stating that to the extent the decision was based "on prior or contemporaneous agreements between [the student] and her university as to the amount of credit it would extend her and the amount and time of her future repayment, it is easily distinguishable" from the Second Circuit's case.2

    The definition of a student loan can vary dramatically in courts across the nation. In some courts, a loan arises when there is an actual advance of money to the debtor.3 In others, a loan is a written agreement executed contemporaneously with the extension of credit.4 Various courts emphasize the substance of the transaction and the underlying intent of the parties.5 Finally, a number of courts find short-term, un-memorialized extensions of credit to be loans.6

    Of course, a college or university cannot control the court in which a student files a bankruptcy. However, it can control the nature and type of obligation that the student incurs. On one end of the spectrum, a court may be likely to discharge an obligation incurred where a student attends classes and incurs a tuition fee without signing any document. On the other end, a court is less likely to discharge an obligation that is evidenced by a detailed loan document that was signed prior to class attendance and clearly expresses an intention to extend credit.

    The best advice in these situations is to look at each existing obligation independently. Colleges and universities should seek a legal opinion to determine whether the debts owed to them may be discharged in a bankruptcy. Likewise, you should not assume that all courts will deem your tuition receivables non-dischargeable. As the balances increase on tuition receivables, you will want to have an attorney review the obligation and the law in the jurisdiction in which the bankruptcy was filed. Depending on several factors, your attorney should be able to determine whether the court will likely discharge the obligation, except it from discharge, or whether there is not enough established law in the jurisdiction to make a prediction. Even in the latter scenario, depending on the balance of the obligation, you may be the first to go in front of the judge to explain why your obligation should not be discharged.

    In lieu of the factors above, it would be worthwhile to have your counsel review your institution's procedures for extending credit to best ensure that the transaction will be deemed a student loan.

    1 In re Merchant, 958 F.2d 738 (6th Cir. 1992).
    2 In re Renshaw, 222 F.3rd 82 (2d Cir. 2000).
    3 In re DePasquale, 211 B.R. 439 (Bankr. D. Mass 1997).
    4 In re Merchant, 958 F.2d 738 (6th Cir. 1992).
    5 In re Avila, 53 B.R. 933 (Bankr. W.D.N.Y. 1985).
    6 In re Hill, 44 B.R. 645 (Bankr. D. Mass. 1984).