What Is a Loan?

Posted by NCBRC - June 5, 2018

Money need not change hands for a deferred tuition payment plan to be a “loan,” for purposes of nondischargeability under section 523(a)(8). In re Hazelton, No.16-12372 (Bankr. W.D. Wisc. Feb. 23, 2018).

Ms. Hazelton enrolled at the University of Wisconsin, Stout, and entered into a Payment Plan which deferred her tuition payments until the end of the first week of classes. She completed her degree requirements but did not pay the tuition according to the Payment Plan. Stout withheld her degree pending payment of her tuition and intercepted her state tax return. Ms. Hazelton and her husband obtained a chapter 7 discharge and sought sanctions against Stout for its collection efforts, arguing that the tuition deferment did not constitute a student loan and that the debt was therefore discharged in chapter 7 along with her other debts.

The court began with definitions. The Internal Revenue Code, section 221(d)(1), defines a “qualified education loan” as “any indebtedness incurred by the [debtor] solely to pay qualified higher education expenses.” Black’s Law Dictionary, defines a “loan” as “[t]he creation of debt by the lender’s payment of or agreement to pay money to the debtor or to a third party for the account of the debtor . . . .” Under a contractual analysis, the court found that a “loan” is created when one party extends a benefit to a second party with the promise by the second party to repay the benefit at a later date.

Here, the Plan itself included language suggestive of a loan referring to an “extension of credit” and an 18% yearly interest rate. The court reasoned that Stout extended credit for the purpose of covering Ms. Hazelton’s tuition, and Ms. Hazelton agreed to repay the tuition debt at a later date. A finding that money had to physically change hands would ignore commercial lending realities and unnecessarily limit the way student loans are transacted.

The court concluded that the loan was not discharged in Ms. Hazelton’s chapter 7 bankruptcy.

Hazelton Bankr WD Wis opinion Feb 2018



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