SECTION 523(a)(8)(A)(ii) of the current bankruptcy code states that “an obligation to repay funds received as an educational benefit, scholarship or stipend;” is not dischargeable in bankruptcy unless excepting such debt from discharge would impose an undue hardship on the debtor and the debtor’s dependents. An adversarial proceeding is required to determine if a student loan is dischargeable. To discharge a student loan, debtor must satisfy all 3 prongs of the Breunner Test enunciated by the Supreme Court. But we are not going to discuss the 3-prong test in this article.
The legal issue we will discuss is whether or not a COLLEGE TUITION DEFERRAL is dischargeable in bankruptcy. Let’s say that you attended 4 years of college in Harvard and graduated with a B.S. in Biology. Thereafter, you continued in Harvard Medical School and graduated with an M.D. degree. The total cost of your college and medical education was $500,000. Every year that you were in Harvard, you signed a promissory note promising to pay the tuition once you finished your residency specialization in neurosurgery, and started working as a neurosurgeon. In other words, Harvard agreed to defer your tuition in exchange for your promise to pay the tuition when you started employment as a neurosurgeon.
A month after you start working as a neurosurgeon, you decide that you’d rather work as a physical fitness instructor at the local gym. As a Fitness teacher, you can barely make ends meet with your gross income of $1,500, although you receive a lifetime supply of muscle building super protein for free. After a year, you look buff and cut and become a “chick magnet” which is what you were really wanted out of life. But you are living hand to mouth and unable to pay any portion of the promissory notes that you gave to Harvard to have your tuition deferred. You throw in the towel and file for Chapter 7 bankruptcy to discharge the $500,000 owed to Harvard for your college and medical school tuition.
Harvard files an adversary complaint alleging that the $500,000 was your tuition loans therefore are not dischargeable. Harvard then files a motion for summary judgment claiming that there is no genuine dispute as to any material fact and that they are entitled to a judgment in their favor as a matter of law. Who do you think is correct?
In Re Ann Coelho and Isoke Femi, a Northern California case decided last month: Plaintiff was a private educational institution. Debtor attended the school’s psychology PH.D. Program from 1996 to 2002. The school funded the debtor’s tuition loans each year pursuant to written promissory notes. After debtor filed for Chapter 13 in May 2013, the school brought an adversary case seeking a determination that its claim was non-dischargeable pursuant to Section 523(a)(8)(ii). The court noted that the only issue in the case was whether the promissory notes created “an obligation to repay funds received as an educational benefit, scholarship or stipend.” If not, then the school’s claim would not qualify for the discharge exemption under that section, which was the only part of Section 523(a)(8) that possibly applied to the school’s claim.
The court ruled “The phrase, REPAY FUNDS RECEIVED must be interpreted according to its plain meaning and requires the court to find that a debtor RECEIVED actual funds…before declaring an education benefit non-dischargeable!” The court denied the school’s motion for summary judgment, and stated that it would enter judgment in debtor’s favor! Therefore, according to this ruling, a college tuition deferral is DISCHARGEABLE.
Thus, it appears at this point, that Mr. Neurosurgeon turned physical fitness instructor will be able to discharge the $300,000 owed to Harvard for his college and medical school tuition. Following this court’s ruling, Harvard’s adversary case will fail and debtor will be free of the $300,000 tuition debt upon entry of the discharge order.
Here’s the kicker. After defeating Harvard’s $500,000 tuition adversary claim and becoming totally free of your student loans, you decide that since you are now a “chick magnet” with the body of Adonis, you might as well return to being a neurosurgeon because having a million dollar income and the body of Adonis sure beats $18,000 a year income as a fitness instructor despite being mistaken for Adonis. Thus, proving to one and all that you can have your cake and eat it too.
“As for God, his way is perfect; the word of the Lord is flawless. He is a shield for all who take refuge in Him.” 2Samuel 22:31.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Mailstop 58 Bldg A-1 Suite 1125 Alhambra, CA 91803.