by “[W]hen a private educational institution finances a deferred payment of its tuition and related fees owed by one of its students that did not involve a third party loan or an exchange of funds,” the debt is not excepted from discharge under section 523(a)(8). Institute of Imaginal Studies v. Christoff, No.13-10808, A.P. 13-3186 (Bankr. N.D. Cal. June 11, 2014). The debtor enrolled in the Institute of Imaginal Studies dba Meridian University and received two loans in the form of tuition credit for which she signed a promissory note incurring the obligation to repay the loans at a rate of $350/month, 9% interest. When she filed chapter 7 bankruptcy, Meridian filed an adversary proceeding seeking to have the debt found nondischargeable under section 523(a)(8) and moved for summary judgment. The bankruptcy court overruled its motion for summary judgment and granted judgment in favor of the debtor.
Noting the tension between a debtor’s fresh start and Congress’s “seemingly endless” desire to except more student loans from discharge, the court turned to the statutory text. Section 523(a)(8) lists three student loans that are nondischargeable: (A)(i) an educational benefit or loan through a governmental unit; (A)(ii) “an obligation to repay funds received as an educational benefit”; and (B) an educational loan that satisfies the definition set forth in section 221(d)(1) of the Internal Revenue Code. It was undisputed that the loan at issue here, if nondischargeable at all, would be excepted from discharge under subparagraph (A)(ii). The court therefore focused its attention on whether the transaction gave rise to “an obligation to repay funds received.” Because there was no third party lender, the court rejected Meridian’s argument that it received the funds. Instead, the court found that, “[b]ecause Debtor’s obligations under applicable documents were to pay the amount under the Promissory Notes . . . but did not flow from ‘funds received’ either by her as the student or by Meridian from any other source, the debt is not covered by this section and is therefore eligible for discharge in Debtor’s discharge.”
The court explained that its finding was based on the BAPCPA amendments to section 523(a)(8). Prior to BAPCPA, the Code did not differentiate between “loans” and “funds received.” BAPCPA, however, “delinked” “funds received” from the phrases “educational benefit or loan” in subparagraph (A)(i) and “any other educational loan” in subparagraph (B).
Cases finding otherwise were typically based on pre-BAPCPA law and focused on whether the loan fit the definition of “educational loan.” See, e.g., McKay v. Ingleson, 558 F.3d 888 (9th Cir. 2009). The court found only one case that was on point. In re Oliver, 499 B.R. 617 (Bankr. S.D. Ind. 2013) (finding that in order for a debtor to incur an obligation to repay funds received, she (or the institution) had to receive funds).