Discharging Student Loans

Can Student Loans Be Discharged if Debtor Did Not Receive the Funds?

Disclaimer: The first thing to know about this case is that it is from the 9th Circuit. It seems to me that 10th Circuit Judges rarely look to the 9th Circuit for case law precedence. However, I believe 10th Circuit Bankrupty attorneys should not overlook this case as it could be a valid argument in seeking a discharge in this Circuit.

Decision: Student Loan Debt under 11 U.S.C. § 523(a)(8)(A)(ii) Requires Actual Receipt of Funds by the Debtor

Facts: In this case, the debtor, Tarra Christoff, enrolled at Meridian University and obtained a financial aid package. The financial aid gave her a “tuition credit” but she did not actually receive any funds. She signed a promissory note to repay the tuition credit in monthly installments after she completed her degree, or if she were to withdraw before finishing her degree from the University. She received another “tuition credit” for her 2nd year of studies. Tarra defaulted on the agreements by failing to pay all payments required under the promissory notes. Tarra later filed for bankruptcy relief under Chapter 7 of the bankruptcy code. Typically, it is the debtor who files a complaint to determine whether a student loan is dischargeable. However, in this case, the University filed the adversarial complaint seeking nondischargeability of the debt.

This was a case of first impression for the 9th Circuit BAP (Bankruptcy Appellate Panel). The court agreed with the Bankruptcy Court in holding that a student loan debt can be denied a discharge under § 523(a)(8)(A)(ii) only if the debtor actually received funds from the plaintiff. Institute of Imaginal Studies dba Meridian University v. Tarra Nichole Christoff (In re Christoff), 2015 WL 1396630.

The pertinent language in the Bankruptcy Code that relates to dischargeability of Student Loans is found at 11 U.S.C. § 523(a)(8) which states:

(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)(i) an educational 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 educational benefit, scholarship, or stipend; or
(B) 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; [emphasis added]

Like all good courts should, the BAP looked first at the plain language of the statute by focusing on the language under paragraph 8(A)(ii) which says, “funds received.” Without question, the debtor received no funds from Meridian. Instead, the promissory note was based a tuition credit. The bankruptcy court held the debt was dischargeable because the plain language of the statute required the debtor to receive funds, and the debtor had not received any funds from the University.

If your student loans are an intolerable burden, please call me at 801-281-3075 and let me help you.

Last Edited on July 31, 2015