The Ninth Circuit Bankruptcy Appellate Panel delved into some of the changes that Congress made in 2005, intentionally or not, when it amended Section 523(a)(8) dealing with the nondischargeability of student loans.
The case involved a woman who took on more than $70,000 in non-governmental loans to attend a medical school in the Caribbean that did not qualify as an “eligible educational institution.” She received a standard discharge in chapter 7 and subsequently filed a complaint to declare that the loans were dischargeable under Section 523(a)(8).
The lender paid the funds directly to the medical school. The debtor therefore contended that loans were not “funds received as an educational benefit” under Section 523(a)(8)(A)(ii).
The bankruptcy court held that the loans were not dischargeable. In an opinion on April 28 by Bankruptcy Judge Robert J. Faris, the BAP reversed and remanded.
On the “funds received” prong, the BAP held that the loan proceeds were “funds received” even though the money went directly from the lender to school. The BAP said there is no requirement of an “actual transfer of money” to the debtor.
The BAP distinguished its Christoff decision from 2015, where the panel held that an obligation to repay financial aid from a university was not “funds received.” In that case, the BAP said that neither the university nor the debtor received any funds. Rather, the BAP said, “the university just agreed to be paid at a later date.”
The more significant feature of the opinion deals with the aspect of Section 523(a)(8)(A)(ii) barring discharge of “an obligation to repay funds received as an educational benefit . . . .”
The lender contended that the loan was an “educational benefit” thus excepted from discharge. The BAP disagreed.
Where subsection (A)(i) refers to a “loan,” subsection (A)(ii) does not. Instead, subsection (A)(ii) uses the term “educational benefit.”
In Christoff, the panel presumed that the amendments in 2005 gave each subsection “a distinct function” and targeted “different kinds of debts.” The BAP therefore held that “a ‘loan’ is not an ‘educational benefit’ within Section 523(a)(8)(A)(ii)” because the BAPCPA amendments delinked the two terms. As a result, the loan was not nondischargeable under subsection (A)(ii).
In the case at hand, the record did not indicate whether the loan was made by a nonprofit organization. It was therefore unclear whether the loan might fall under subsection (8)(A)(i) and be nondischargeable.
Since a student loan will be nondischargeable if it falls into any of the categories in subsection 8, the panel was obliged to remand the case to the bankruptcy court to determine if the loan was from a nonprofit organization.