Educational Loans from a Private Lender Are Held Dischargeable

Following what she called the “trending narrow view,” Bankruptcy Judge Kimberley H. Tyson of Denver ruled that not all educational loans are presumptively nondischargeable. She held that an educational loan from a private lender is discharged automatically because it does not fit within one of the categories in Section 507(a)(8)(A) or (B).

In addition to concededly nondischargeable, federally guaranteed student loans, a couple had amassed almost $110,000 in educational loans from a private lender that evidently had grown to almost $250,000 with interest.

The couple confirmed a chapter 13 plan providing that the student loans would be treated as unsecured claims or “deferred until the end of the plan.” During the chapter 13 case, the debtors paid almost $27,000 on the private loans.

After discharge, the lender contended that the loans were nondischargeable and continued collection activities, prompting the couple to pay an additional $37,500 toward the private loans.

More than two years after discharge, the couple reopened their chapter 13 case and filed an adversary proceeding against the lender. The debtors sought to hold the lender in contempt alongside a declaration that private loans were discharged.

The lender filed a motion to dismiss, which Judge Tyson denied in her September 24 opinion.

Citing the Supreme Court’s Espinosa decision, the lender argued that res judicata precluded the debtors from contending that the private loans were discharged. Judge Tyson didn’t buy the argument.

Res judicata did not apply, Judge Tyson said, because the plan did not classify the student loans as dischargeable or not.

Next, and most significantly for the developing body of case law, the lender contended that the private loans were a nondischargeable “obligation to repay funds received as an educational benefit, scholarship or stipend” under Section 523(a)(8)(A)(ii). The lender was forced to rely on subsection (A)(ii), because the loans were not qualified educational loans under subsection (B), nor were they made or guaranteed by the government or a nonprofit institution under subsection (A)(i).

With regard to subsection (A)(ii), Judge Tyson said the courts are divided, with some courts holding that private loans qualify as an “educational benefit” and are therefore nondischargeable. The Tenth Circuit has no controlling authority, she said.

Ruling in favor of the debtors, Judge Tyson in large part based her opinion on the absence of the word “loan” in subsection (A)(ii). She noted that the word “loan” does appear in subsections (B) and (A)(i).

Favorably citing a 2018 decision by Chief Bankruptcy Judge David R. Jones of Houston, Judge Tyson said that the statutory language — “an obligation to repay funds received as an educational benefit, scholarship or stipend”— “does not include a loan.”

Judge Tyson also attached significance to the word “as,” which she called a “qualifier” denoting “how the funds were received.” In the case at bar, the funds were received as a loan, not as an educational benefit, scholarship or stipend.

If subsection (A)(ii) included loans, the other subsections would be superfluous, she said, because the categories covered by the other subsections would be subsumed within subsection (A)(ii).

The lender also argued that there is no private right of action for a discharge violation. Judge Tyson rejected this argument, saying that the court’s equitable powers under Section 105(a) allow the court to remedy violations of substantive provisions of the Bankruptcy Code.

The lender contended the discharge order was not sufficiently specific to justify a finding of contempt.

Any ambiguity in the discharge order, Judge Tyson said, would be relevant to whether the discharge violation was willful. She therefore declined to dismiss on that ground, saying that the evidence at trial will determine whether there is support for the claim.

For ABI’s discussion of other cases emblematic of the split, click here.