Is tuition owed to a university dischargeable in Chapter 7?

[caramia1225]

Hello everyone,

I am preparing my BK case and have been doing a lot of research. I have a unique situation, which I have not been able to find the answer to.

I attained a student loan to cover two classes at an accredited university. I received approximately $10,000 from the US Dept of Education. Approximately $2,000 was applied to my tuition and the remainder, approx $8,000, was credited to my student account in cash.

I subsequently dropped both classes. Because I did not fulfill my requirements to receive financial aid, the university had to give the full $10,000 back to the Dept of Education.

Now as a result, I owe the $10,000 to the university, not the US Dept of Education.

My question is, since I owe the money for tuition and overage to the university... Is that debt now dischargeable in bankruptcy?

Any input is very much appreciated!

[NoMoreCards]

I had that situation, however it was for less amount. You would only owe the college the 2k, not 10. They claimed it was not dischargable however after a stern letter from my lawyer, i never heard from them again. Nor do they show on my credit report. Not sure how this is typically handled though, so ypur millage may vary. Of course that 2k would only be if you didnt take the excess 8k.

[Flamingo]

The entire $10,000 loan is under your name via a government student loan. The loan is not in the name of the School and it is not the school's responsibility to pay the loan back. When you took the loan and signed for the loan, you permitted the school to make the necessary distributoin from those funds toward the period of eduction covered by that loan (full year, semester, etc.). Since you used $2,000 of a government student loan toward tuition, defaulted and cannot repay that back, you owe the Government $2,000 not the school. I am assuming the school returned the other $8,000. My daughter is going through college using Government student loans and one semester had to drop out early from that semester. She had to pay back that portion of the loan for the time she would not be attending. If she did not, she would have messed up any chances for any future student loans and would be eventually billed by whoever would collect for the government as to those student loans. This was information given to us by her college.

Those funds are not dischargeable in BK as they came from the government and you can eventually expect a bill from somewhere as to that amount and probably have blown any future chances for a future studenet loan from the government if you don't pay that back. Speak with the financial aid department at your school to back all this up or contact a BK attorney.

[bcohen]

Flamingo, I do not see where the student loan is still outstanding. The way I read this, OP dropped the classes early enough in the semester that the student loan provider (in this case the government) took the money back from the university and canceled the loan(s). Therefore, the debt is owed to the university, and is not a student loan. Now the question would seem to be where the money went.

If the money remained in the student's account, and was not withdrawn or used for any non-education purpose, then the only amount which the university can claim is owed is the $2000 for tuition and fees (if you dropped after the full refund deadline) however that is certainly dischargeable in bankruptcy.

If OP received a refund check from the university bursar's office for the $8000 above and beyond the actual tuition and fees, then spent the money on something else, and then dropped out of school, that could be construed as fraud during a bankruptcy. The $2000 which was presumably taken by the university for tuition and fees could definitely be discharged, but the $8000 would probably be treated as a debt arising from pre-planned fraud and therefore ruled non-dischargeable.

[AngelinaCatHub]

Flamingo, I do not see where the student loan is still outstanding. The way I read this, OP dropped the classes early enough in the semester that the student loan provider (in this case the government) took the money back from the university and canceled the loan(s). Therefore, the debt is owed to the university, and is not a student loan. Now the question would seem to be where the money went.

If the money remained in the student's account, and was not withdrawn or used for any non-education purpose, then the only amount which the university can claim is owed is the $2000 for tuition and fees (if you dropped after the full refund deadline) however that is certainly dischargeable in bankruptcy.

If OP received a refund check from the university bursar's office for the $8000 above and beyond the actual tuition and fees, then spent the money on something else, and then dropped out of school, that could be construed as fraud during a bankruptcy. The $2000 which was presumably taken by the university for tuition and fees could definitely be discharged, but the $8000 would probably be treated as a debt arising from pre-planned fraud and therefore ruled non-dischargeable.

This is what I got out of the OPs post. I agree.

I have an person whom I've known (can't spell Akwaintants) who used up 3K. He did nothing but spend the money. Now he is getting it pulled from his SS. You can't out do the IRS. Government gives freely, IRS takes everything back. 'Hub

[Flamingo]

Since one can read the OP's posting in different ways and it is not clear what amount was sent back to the government and whether or not the OP actually attended class (the OP says he owes the University $10,000 and not the Dept. of Education so there is some confusion, bad wording or misunderstanding going on here), more information is needed. If the University kept the $2,000 for time actually spent in class and just returned the unused portion of the OP's loan to the government, the OP owes the government, not the school. The school got paid for that time with the government loan. The default would be with the government. The OP needs to pull out his/her paperwork and review what he/she signed when taking on this loan and the consequences of dropping out and the proration involved, or contact the financial aid office at that school to go over what exactly occurred and what went where. If similar circumstances were allowed to be discharged in BK after attending classes and dropping out and there was a government student loan involved, it would be very convenient for some looking to work the system.

I would say speak to a BK attorney (I believe the OP is looking to file pro se when reading his post), review the loan documents and signed paperwork and get proper documentation from the school involved as to what funds went where. To not do otherwise and just guess and include all or part of those funds in a BK is just asking for problems.

[NoMoreCards]

If similar circumstances were allowed to be discharged in BK after attending classes and dropping out and there was a government student loan involved, it would be very convenient for some looking to work the system.

My situation was similar, however not the same. In total I had just under 12K in student loans, which I am making payments on. I had 1 class which I dropped and Direct Loans took that money back from the school leaving my school account in the negitive. Therefore I owed the school. In my case (if I recall correctly), I owed under 1K to the school. They continued to try to collect after filing BK and my lawyer sent a stern letter to the school. They withheld my transcript for about 4 months after my BK discharged & closed and then they released the transcript to me. I have not heard from the school regarding the 1K that I owed them when I filed.

So situation was similar, however different. I still owe the goverment for my student loans are am paying as agreed, my account is in good standing. I just didn't pay the school as I was advised by my attorney.

[HHM]

Be Careful, since the original intent was to use student loans to fund the tuition, you probably signed a "master promissory note". That note will treat the unpaid tuition as a LOAN.

Also, when you say YOU are preparing your BK, I take it you mean you are not filing with the help of an attorney. In a situation with a "unique" situation, that is a bad idea.

I can practically guarantee what will happen
1. You will file the BK pro se, and list the student loans
2. based on the information provided, you will ASSUME the debt to the school is dischargeable.
3. After the BK is discharged, the school will try to collect.
4. You may or may not know what to do.
5. Eventually, you will discover that you will need to file an Adversary proceeding to determine if the debt can be discharged
6. At that point, you will/should hire an attorney but find that most experienced in this area will charge a huge sum $5-10K

Might want to consider hiring an attorney now, and pay a little extra upfront to get a better sense of the status of this debt.

[justbroke]

Actually, I'm wondering where the $8K went! In Florida, the school will typically transfer the money from the student's bursar account at the school to the Higher One account (which has a debit Mastercard attached). If the poster in fact took the HigherOne account (and/or debit card) and spent the $8K... this makes it more complex!

Remember, that to qualify for Stafford Loans (Government-backed loans), the student must maintain a minimum status of at least a part-time student. Dropping a class would disqualify the student for the loan. However, that doesn't mean that the student dropped the class prior to the last day to drop a class to receive a 100% refund!

I would say that the School may be right to treat this as a "student loan" for the purposes of eduction and that it is not dischargeable. The only way to really new is to file a complaint to determine dischargeability.

So, my questions are... was the class dropped prior to the 100% drop date and where is the $8K?

[Exployer1234]

If any of the money was kept then yes it has to be paid back. If all 10K was sent back to the loan provider then nothing is owed.

If all but 2K was kept by the school, then you still owe the student loan lender 2K.

If the lender was the government (example: Direct Loan) then it is not dischargeable in BK.

It sounds like you owe the lender and not the school. Even if the school returned the unused portion of the money you still owe the lender for what was not sent back. I would call the lender and see what the balance is.

[HHM]

If any of the money was kept then yes it has to be paid back. If all 10K was sent back to the loan provider then nothing is owed.

If all but 2K was kept by the school, then you still owe the student loan lender 2K.

If the lender was the government (example: Direct Loan) then it is not dischargeable in BK.

It sounds like you owe the lender and not the school. Even if the school returned the unused portion of the money you still owe the lender for what was not sent back. I would call the lender and see what the balance is.

Only 1 slight inaccuracy, "If the lender was the government (example: Direct Loan) then it is not dischargeable in BK", ALL loans or benefits used for or intended for an educational benefit, whether government or private, are non-dischargeable.

[caramia1225]

Since one can read the OP's posting in different ways and it is not clear what amount was sent back to the government and whether or not the OP actually attended class (the OP says he owes the University $10,000 and not the Dept. of Education so there is some confusion, bad wording or misunderstanding going on here), more information is needed.

Flamingo, thank you for your comments, however, please reread my post. The School sent the entire $10,000 back to the government... I now owe the school $10,000, not the government.

[caramia1225]

Also, when you say YOU are preparing your BK, I take it you mean you are not filing with the help of an attorney. In a situation with a "unique" situation, that is a bad idea.

I can practically guarantee what will happen
1. You will file the BK pro se, and list the student loans
2. based on the information provided, you will ASSUME the debt to the school is dischargeable.
3. After the BK is discharged, the school will try to collect.
4. You may or may not know what to do.
5. Eventually, you will discover that you will need to file an Adversary proceeding to determine if the debt can be discharged
6. At that point, you will/should hire an attorney but find that most experienced in this area will charge a huge sum $5-10K

HHM, I did not say I was filing BK pro se... the only one ASSUMING here is you.

"I can practically guarantee what will happen".... What the hell? You are a moron.... You have no clue who I am or what my plan is... You are ASSUMING your ass off, and being very demeaning.

Everyone else, thank you very much for your comments. To clarify some points... I took two classes. Because of circumstances beyond my control, I had to withdraw after I was 100% fee liable...

I used the $2,000 for tuition and the $8,000 for living expenses. All $10,000 that the school received from the government was returned to the government. I am not concerned about the BK court looking at this like fraud, because I had attended the university for several semesters before with a 4.00 GPA, and I have proof of the hardship that made it necessary to withdraw.

This is just a unique situation that even my BK attorney can not completely predict. I thought maybe someone may have had a similar situation.

My attorney's opinion is that the $2,000 is definitely a tuition debt to the school, thus dischargeable. The other $8,000 is questionable. I signed a promissory note for the government loan, not with the school.

[Flamingo]

Caramia - I too gathered from your wording in your original posting that you were filing pro se....you did not mention you had an attorney at all but were "preparing" your BK case. If you provided a bit more information, it would have been easier for many to respond and not "assume". Did you see HHM's posting in response to exployer1234's posting after the one you quote above as to a possible pro se filing?

"Quote Originally Posted by Exployer1234 View Post
If any of the money was kept then yes it has to be paid back. If all 10K was sent back to the loan provider then nothing is owed.
If all but 2K was kept by the school, then you still owe the student loan lender 2K.
If the lender was the government (example: Direct Loan) then it is not dischargeable in BK.
It sounds like you owe the lender and not the school. Even if the school returned the unused portion of the money you still owe the lender for what was not sent back. I would call the lender and see what the balance is.
Response by HHM - Only 1 slight inaccuracy, "If the lender was the government (example: Direct Loan) then it is not dischargeable in BK", ALL loans or benefits used for or intended for an educational benefit, whether government or private, are non-dischargeable."

It appears none of the $10,000 is dischargeable and your attorney is the one who should be doing research on this, not you, if you have retained him, but I understand your concern as to what you are responsible for; you can be sure you are going to run into some issues on this. Also, HHM was giving you marvelous advice if you were, in fact, going to attempt to file pro se. Many people attempt it and wind up in serious trouble.

[HHM]

I can practically guarantee what will happen".... What the hell? You are a moron.... You have no clue who I am or what my plan is... You are ASSUMING your ass off, and being very demeaning.

That's okay, no one likes to hear the "bad things". However, after 13,000 posts on this forum, there are very few people that would consider me a moron. And you are correct, most attorneys know squat about student loan issues.

In any event, in a situation like this, you need to be proactive. Since at NO POINT did you mention filing an adversary proceeding to determine discahargeability, my guess is, no one has discussed that with you (maybe I am wrong, but our advice is can only be based off the information provided). What you need to do is get a hold of EVERYTHING you ever signed with the school and for the loan, and the school's policy manual.

Reason being, schools are getting pretty smart about this situation, so the advice earlier in the thread regarding when you canceled (e.g. the schools refund policy) is very important, but if the school is trying to collect, I "assume" the school considers the amount due. The law is actually pretty clear on tuition vs student loans. Tuition and expenses owed the school is a dischargeable debt UNLESS as part of the enrollment to the school, there is a promissory note clause that says, in effect, (paraphrasing) "if the school is to be paid by financial aid, and the funds are not received or required to be refunded, the balance due is a loan." Keep in mind, the loan only needs for an "educational benefit" under IRS rules, that is a fairly broad definition.

So, you need to do some serious due diligence and I would advise actually filing a motion as part of your BK to determine dischargeability, otherwise, my outline of the events to come will, most likely, come true. You will either fight about it upfront and be proactive (and yes, that will cost some money), our you will fight about later (after the BK), which would likely cost even more money. You are likely on the winning side of this, but that doesn't mean you don't do the due diligence and don't prepare to fight.