Unpaid Tuition Balance not Student Loan

The failure to pay tuition did not result in nondischargeable debt. So said the court in In re Oliver, No. 12-4185 (Bankr. S.D. Ind. Oct. 8, 2013). In that case, the court granted the debtor’s motion for contempt for violation of the discharge injunction against creditor, Ball State University. The agreement giving rise to the debt was the registration contract under which the debtor agreed to pay for the classes she registered for but which contained no provision for what would happen if she failed to do so. Registration was not made contingent upon payment.

After receiving a bankruptcy discharge, the debtor sought to have her Ball State credits transferred to Indiana Tech, but Ball State, citing the unpaid debt, refused to send the transcript. The debtor relied on the pre-BAPCPA case of In re Chambers, 348 F.3d 650 (7th Cir. 2003), for the argument that an unpaid tuition balance is not a “loan” within the meaning of the nondischargeability provisions of the Bankruptcy Code. See also In re Mehta, 310 F.3d 308 (3d Cir.2002); In re Renshaw, 222 F.3d 82, 90-91 (2d Cir.2000).

Ball State maintained that the BAPCPA amendments to section 523(a)(8) expanded the definition of student loans to cover the debt at issue and that the common law definition of loan set forth in Chambers was no longer relevant. In the alternative, Ball State argued that the unpaid tuition balance was a loan under the pre-BAPCPA framework.

The court acknowledged that BAPCPA expanded the scope of student loans that are not susceptible to discharge, see Sensient Technologies Corp. (In re Baiocchi), 389 B.R. 828, 831-32 (Bankr. E.D. Wis. 2008), but held that the 2005 amendments to the Code did not abrogate the requirement that there be a “loan.”

(The issue of the effect of BAPCPA on student loan dischargeability often arises in the context of whether the loan is for an “educational benefit.” See In re Baiocchi, 389 B.R. at 832 (funds a debtor received from an employer to attend law school provided an educational benefit); see also Skipworth v. Citibank Student Loan Corp. (In re Skipworth), No. 09-80149-JAC-7, 2010 WL 1417964, at *2 (Bankr. N.D. Ala. March 2, 2011) (a loan from Citibank to pay for the debtor’s bar review course constituted funds received as an educational benefit)).

The court found that  “[u]nder the Chambers framework, the Debt is a loan if either (a) funds have changed hands from Ball State, as lender, to Debtor, as borrower, or (b) there is an agreement reached prior to or contemporaneous with the transfer of educational services whereby the college extends credit. Chambers, 348 F.3d at 657.”

The court found that the failure to pay the balance due on a tuition bill did not meet either of these tests. There was no transfer of funds from the lender to the debtor, nor was there an extension of credit contemporaneous with the transfer of educational services. The registration contract necessarily pre-dated the transfer of educational services and implicitly contemplated the possibility of some financial accommodation either through student loans or otherwise. Therefore, there was no “loan” within the meaning of section 523(a)(8).

With respect to whether the refusal to forward the debtor’s transcript was an attempt to collect on a debt in violation of the discharge injunction, the court found that, under In re Kuehn, 563 F.3d 289, 294 (7th Cir. 2009), it was. However, because the debtor failed to provide evidence of actual damage and Ball State was acting in good faith, the court ordered Ball State to transfer the transcript but did not order a monetary sanction.

Oliver opinion