Sometimes the most important question about discharging student loans in bankruptcy can be as small as whether you received the check. That’s what Tarra Christoff found when she filed for bankruptcy in Northern California.
In 2002, Tarra Christoff applied to Center for Transformative Learning at Meridian University, a private university in California, with the goal of becoming a psychologist. As part of her financial aid package, the school offered Christoff $6,000 in financial aid to pay a portion of her first year tuition. For the second year, Meridian offered her $5,000 in financial aid. For both years, she signed a promissory note agreeing to repay the funds with interest.
Christoff made a few payments after she left Meridian, then fell behind. Ultimately, the matter was submitted to arbitration and Tarra was ordered to repay the unpaid balance due plus interest.
Had this been Christoff’s only debt then there’s a good chance she would have made payment arrangements to handle the loans. Unfortunately, the debts to Meridian were a tiny portion of what ultimately came to well over $200,000 in debt. Finally, she made the decision in 2013 to file for bankruptcy.
To wipe out student loans in bankruptcy, Christoff would ordinarily have filed an adversary proceeding – a lawsuit against the student loan creditor in bankruptcy court seeking a discharge of the debt. But that didn’t happen here because her lawyer recognized one thing the university did not.
The student loan wasn’t one of the kinds that couldn’t be wiped out under the bankruptcy laws.
Meridian, seeing that there might be a problem later on, decided to look to the bankruptcy court for a determination that the loan wasn’t going to be wiped out in bankruptcy.
The judge, after looking at the loan as well as the bankruptcy law, held that the loan would be discharged once Christoff got to the end of her bankruptcy case.
Meridian appealed the decision, and the appellate court agreed with the bankruptcy judge.
Once she received her discharge in bankruptcy, the student loan would be wiped out in spite of the fact that Christoff hadn’t made any showing of undue hardship.
Why made this loan so special?
Under the bankruptcy laws, a private student loan can’t be discharged unless there’s a showing that repaying that loan would cause an undue hardship. But that provision of of the law doesn’t apply when a borrower doesn’t receive any funds, but only agrees with the school to pay the tuition at a later date.
The question isn’t one of whether a loan was made, according to the bankruptcy court. Rather, the borrower must receive actual funds.
The logic applies only for private student loans – the portion of the bankruptcy law that governs federal student loans doesn’t hinge on receipt of actual funds.
The decision seems to reflect the growing sense on the part of bankruptcy court judges to try to find ways to help student loan borrowers. The courts have become increasingly frustrated with a bankruptcy system that forces people to prove that their situation is nearly hopeless before allowing the discharge of student loan debt. To combat the unfairness of the law, some judges have started actively looking for way around the problem.
In order to allow them to keep chipping away at the rules, however, bankruptcy lawyers and student loan borrowers need to keep carefully looking at their debts. Review the paperwork, including the actual check issued by the lender, to make sure everything complies with federal and state laws.
Get a student loan lawyer involved, as Christoff did; thankfully, her attorney is a fellow graduate of The Student Loan Law Workshop and has a deeper understanding of these issues than might otherwise be the case.
If you’ve got a strong enough argument in your favor, bring it to your bankruptcy court and be prepared to fight hard for every penny of relief. You may not win the case, but at least you’ll be able to say that you tried.
And as we all know, you can’t win unless you try.
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