Not all student loans are automatically nondischargeable under Section 523(a)(8), according to the Ninth Circuit Bankruptcy Appellate Panel.

If a student loan wasn’t automatically discharged, the BAP’s May 3 opinion means that the lender may be in contempt of the discharge injunction for attempting to collect the loan, assuming there was no “fair ground of doubt” about dischargeability. See Taggart v. Lorenzen, 139 S. Ct. 1795, 1799 (2019).

In other words, the BAP believes there is no automatic exemption from contempt liability for student loans that were not automatically discharged. Even if the loan was not automatically discharged, Taggart might provide a defense to contempt.

The Student Loan

Immediately after the debtor received her chapter 7 general discharge, the lender began attempting to collect the loan. The debtor’s lawyer sent the lender a message asserting that the loan was not the type of a student loan that was discharged under Section 523(a)(8), but the lender continued attempting to collect.

The debtor then filed a complaint seeking a declaration that the loan was discharged and a finding of contempt. The bankruptcy court ruled that the loan was not the type of a “qualified” student loan that was not discharged under Section 523(a)(8). However, the bankruptcy court believed that Section 523(a)(8) was “self-executing” and that the debt was not discharged until the bankruptcy court made a ruling that it was discharged.

The bankruptcy court therefore held that the attempts at collection did not offend the discharge injunction. The debtor appealed and won in an opinion for the BAP authored by Bankruptcy Judge William J. Lafferty, III.

Not All Student Loans Are Created Equal

Judge Lafferty explained the different types of student loans and how some are not discharged. Generally speaking, student loans are automatically nondischargeable under Section 523(a)(8)(A) if they were made or guaranteed by a governmental unit or a nonprofit institution. Under Section 523(a)(8)(B), a loan is not discharged if it was a “qualified educational loan” under the IRS Code.

Even if the loan is nondischargeable, the bankruptcy court can discharge the loan if the debtor can show “undue hardship” under Section 523(a)(8).

The case on appeal involved a loan that was not a qualified educational loan and was therefore discharged, as the bankruptcy court had ruled. Judge Lafferty described the questions on appeal as follows:

Should the debt be presumed nondischargeable until the debtor proves otherwise?

And should efforts to collect that presumptively nondischargeable debt be exempt from the consequences of violating the discharge injunction?

Section 523(a)(8) Isn’t Self-Executing

The bankruptcy court had relied on the Supreme Court’s opinion in Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 450 (2004), as standing for the proposition that Section 523(a)(8) is “self-executing.”

Judge Lafferty didn’t read Hood that way. He said that Hood dealt with “undue hardship,” an issue not before the BAP. He went on to note how the Court said that student loans of some types “may” survive discharge. “In other words,” he said, “the Court did not hold that every debt with a loose connection to § 523(a)(8) should be considered nondischargeable until proven otherwise.”

Saying that “Hood is not directly applicable to this appeal,” Judge Lafferty described the Supreme Court as providing “little guidance regarding the relationship of the discharge injunction vis-à-vis a debt that is not qualified as an educational loan under § 523(a)(8).” [Emphasis in original.]

With regard to whether Section 523(a)(8) is self-executing, Judge Lafferty analyzed several decisions from courts in other circuits in cases not involving undue hardship. Those cases, he said, “held that a debt that did not qualify for exception [from discharge] under § 523(a)(8) was discharged, along with all other dischargeable debts, at the time of debtor’s general discharge.” In a case where the loan was not a qualified educational loan, a court in Colorado said that “they proceeded at their own risk.” McDaniel v. Navient Sols., LLC (In re McDaniel), 590 B.R. 537, 552 (Bankr. D. Colo. 2018).

In “numerous cases” where the lender attempted to collect a debt that was not a qualified educational loan, Judge Lafferty said that the “courts analyzed whether the lender should be held in contempt for violating the discharge injunction.”

The Loan Was Never Discharged

Judge Lafferty held that “the Debt was discharged by the general discharge order entered in Debtor’s case.” Consequently, he said that the “Creditors’ post-discharge collection efforts must be scrutinized under the standard set forth in Taggart.”

In the case on appeal, the bankruptcy court had not analyzed whether there was a “fair ground of doubt” about discharge, because the bankruptcy court believed that nondischargeability was self-executing. “Contrary to the Code,” Judge Lafferty said, “the bankruptcy court’s interpretation would protect lenders acting without a ‘fair ground of doubt’ from the discharge injunction of § 524(a).”

Because the bankruptcy court had made no findings about “fair ground of doubt,” the issue was not before the BAP. Judge Lafferty vacated the portion of the bankruptcy court’s decision that was inconsistent with the BAP’s ruling and remanded “with instructions for the bankruptcy court to make findings regarding whether Creditors violated the discharge injunction without ‘a fair ground of doubt.’”