By Ryan C. Wood
This topic is extremely relevant given the recent investigation and settlement Corinthian Colleges, Inc. entered into with the Department of Education on July 3, 2014. In a recent decision by the Honorable Dennis Montali in the Christoff case, Bankr. Case No. 13-10808, Adversary Case No. 13-03186, Northern District of California. The debtor, Tarra Christoff, received tuition credit from Institute of Image Studies, doing business as, Meridian University, then filed a Chapter 7 bankruptcy case seeking to discharge her debts. Section 523(a)(8) makes student loans not dischargeable in bankruptcy. The question is, “Are tuition credits student loans and therefore not dischargeable in bankruptcy?”
This issue is of much interest given the recent press coverage of for-profit colleges receiving federal student aid for their students, but graduation rates and job placement are extremely low. According to Wikipedia and various news outlets and my personal experience with clients Corinthian Colleges, Inc. receives millions of dollars in federal subsidized loans for students to attend their for-profit trade schools. The criticism results from aggressive advertising by these for-profit colleges while having extremely low graduation rates and few jobs for graduates. The for-profit college receives the tuition, makes a boat load of money and the student is left holding the bag for loans they cannot pay back and that are not dischargeable under the Bankruptcy Code.
So what about tuition credits? The Christoff case comes down to statutory interpretation of the Section 523(a)(8). Judge Montali ruled that the debt in question in the Christoff case, which did not include any receipt of funds by the student or the institution, is not excepted from discharge under Section 523(a)(8) and therefore dischargeable. Prior to the Bankruptcy Consumer Protection Act of 2005, the language of Section 523(a)(8) was different. The words “funds changing hands” or “funds received” are now a separate category delinked from the phrases “educational benefit or loan.” Section 523(a)(8) excepts from discharge four types of student debt: (1) 523(a)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit; or (2) made under any program fund in whole or in part by a governmental unit or nonprofit institution, or (3) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or (4) 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 that is an individual. Meridian concedes it is not a governmental unit and the credit is not a qualified education loan as defined by section 221(d)(1) of the Internal Revenue Code. So that leaves number (3) above. Christoff received two tuition credits totaling $11,000 and she signed a promissory note, with interest of 9%, agreeing to repay the tuition credits upon graduation at $350 per month. Christoff did not receive any funds and did not complete the program and graduate. In 2013, Christoff filed for bankruptcy protection under Chapter 7 and Meridian filed an adversary proceeding lawsuit to determine if the tuition credits are excepted from discharge under Section 523(a)(8). This case addresses the language of Section 523(a)(8)(A)(ii) which provides “an obligation to repay funds received as an educational benefit, scholarship or stipend” is excepted from discharge. Meridian argued that Christoff received a loan in the form of a tuition credit and received an education. Christoff’s bankruptcy attorney argued that she never received any funds from Meridian and Meridian did not receive any funds from a third-party financing source. Judge Montali focuses on the language “funds received” in Section 523(a)(8)(A)(ii). The Court analyzed a number of cases from other circuits and the Ninth Circuit regarding Section 523(a)(8). Again, the main distinction between the various cases and decisions is whether the debtor/student actually “received funds.” In the Christoff case in the Northern District of California, Judge Montali ruled that because the debtor’s obligations arose from funds not received by the debtor or Meridian from any other source, the underlying debt is not covered by Section 523(a)(8)(ii) and eligible for discharge. On June 26, 2014, Meridian College appealed Judge Montali’s ruling to the Bankruptcy Appellate Panel, Case No. NC14-1336.
