Kentucky Bankruptcy Law

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Student Debt v Student Loan – viva la difference!

A recent decision out of the Norther District of California Bankruptcy Court bolsters a position I have already been espousing. In re Christoff, 510 BR 876 (N.C. Cal. 2014) looked at 11 USC Sect. 523(a)(8) which makes three types of loans non-discharged¬†unless certain things are proven in an adversary proceeding (a lawsuit within the bankrutpcy). The three types of loans are, in essence: government subsidized loans, IRS qualified education loans, and “an obligation to repay funds received as an educational benefit, scholarship or stipend[.]” 11 USC Sect (a)(8)(A)(ii).

This case involved Meridian University directly funding the debtor’s studies in their Psychology program and whether that constituted the third type of debt above. ¬†The court ruled against Meridian because that statutes says “repay funds” thus requiring that actual funds are distributed. Instead, Meridian simply kept a “tab” of sorts of what the debtor owed them for tuition and fees. There was no third-party lender involved that distributed funds to Meridian or to the debtor.

I expect this would be the same outcome if such a debt discharge were challenged here in the Eastern District of Kentucky. This impacts many technical schools that simply charge the student debtor directly for tuition rather than involving an independent third-party lender. It is very good news for student debtors who went to such schools and then discover their training is not quite as marketable as the school led them to believe. So, the student debtor in the case above had student debt, but not a student loan.

August 11, 2014 Posted by | Bankruptcy, Chapter 13, Chapter 7, Discharge, Student loans | , , , , , , , , , , | Leave a comment