August 16, 2009
Bankruptcy Court Rules that Non-Payment of Tuition is not a Non-Dischargeable Student Loan
In re Moore, 407 B.R. 855 (Bkrtcy E.D. VA, June 2009)
Issue: Did an on-line law school violate the discharge injunction when it refused, postpetition, to award the debtor his degree and certify his status to employers? Is the unpaid tuition a non-dischargeable student loan?
Holding: Yes, the refusal violates 524. It is not a non-dischargeable student loan.
This chapter 7 debtor owed about $5,800 to Novus Law School. After the petition was filed, Novus “sent the debtor an email on June 10, 2008, informing him that if the debt owed to it was ‘liquidated through bankruptcy,’ he ‘will not be eligible to receive [his] degree’ nor would Novus ‘validate, certify, and/or verify [his] graduate status to employers.’” The debtor filed a motion for contempt for violating the discharge injunction. The debtor “testified that he has completed all of his course work, including the final project, but has not yet received his degree or final transcript.” “The issues here are whether Novus's refusal to issue a degree or transcript because the debtor has not paid the tuition where the debt was discharged in bankruptcy is a violation of the discharge injunction, and if so, whether the debtor is entitled to an award of damages.”
The bankruptcy court found the school in contempt. It ruled that the damages would be “$10,000.00, to be paid within 30 days, unless within that time it has issued the debtor a degree and a transcript reflecting completion of the degree requirements and has filed with the clerk evidence of its compliance.”
The court first ruled that the debt was not a non-dischargeable student loan. “In the present case, the debt owed by the debtor to Novus can be characterized as an unpaid tuition debt. Such a debt is not an ‘educational benefit overpayment,’ which is an overpayment from a program like the GI Bill, where students receive payments even though they are not attending school. Nor does the debt fall into the ‘obligation to repay funds received’ category, because there is no evidence indicating that the debtor received any funds from Novus.” The “unilateral [decision] not to pay tuition when it came due’ did not constitute a loan and that the unpaid tuition debt owed was therefore not excepted from discharge under § 523(a)(8).” “Of significance to the court was the fact that the debt owed to the school did not involve an advance of cash or exchange of money, nor did the debtor make any arrangements to borrow money from the school or sign a promissory note .”
As to the discharge injunction, the court held that the school violates the stay when it “withhold[s] a debtor's transcript . . . for no other purpose than to compel the payment of a pre-petition debt.”
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