By John Lee

By now most people know that the vast majority of student loans are not dischargeable in bankruptcy. In order to have a student loan discharged in bankruptcy, a debtor must meet the very high standard of “undue hardship.” Undue hardship is achieved if the debtor can prove that he will never have the means to make a substantial repayment on the student loan debt. Merely not being able to pay monthly bills and put food on the table is not sufficient to meet the “undue hardship” standard. In order to meet the “undue hardship” standard and have student loans discharged, in most cases, a debtor must show a permanent disability that will prevent him from meaningful work for the rest of his life.

A non-dischargeable educational debt is any debt owed to a government entity, non-profit entity for education; or “an obligation to repay funds received as an educational benefit.” The “obligation to repay funds received for an educational benefit” is a very broad definition that covers almost any type of loan received for school. Clearly this definition covers not only government backed student loans, but also student loans issued by private institutions and schools. However, there are still educational debts that are dischargeable in bankruptcy.

In the Case of In Re Ronnie Moore (407 BR 855) the Bankruptcy Court ruled that “an unpaid tuition debt” is dischargeable in bankruptcy because it is not an “educational overpayment,” nor is there any evidence indicating that the debtor “received any funds from Novus.” The Moore case seems to hold that tuition owed to a school is dischargeable if the debtor did not sign a contract and did not receive funds from the school. If the debtor unilaterally failed to pay a tuition invoice from the school, then that debt is not classified as a student loan and would be dischargeable in bankruptcy. It seems the Moore ruling would only apply to a very narrow minority of students as the vast majority of students sign a contract and borrow money for their school tuition.

If the bankruptcy court rules that a tuition debt or student loan is discharged, then the college or university must release the student’s transcripts. In most cases, if the student loan is non-dischargeable, then the college must still release the transcripts while the automatic stay is pending, but not after discharge.

Most courts have ruled that a college or university must release transcripts to the student while the automatic stay is pending. The automatic stay is the court order that prevents all creditors from pursuing collection activity against the debtor while the bankruptcy is pending. The vast majority of bankruptcy courts have ruled that the only purpose in withholding a transcript is to collect a debt and therefore the withholding of a transcript is a violation of the automatic stay. In most jurisdictions, if a debtor requests his college transcript while the automatic stay is pending, then the school must release them to him. However, after the bankruptcy case is closed and the automatic stay is lifted, if the debtor still has non-discharged educational debt, then the college can refuse to release the transcript. If a debtor (that owes non-dischargeable educational debt) wishes to get a copy of his college transcript, then he must request it while the automatic stay remains in effect.

While most student loans are not dischargeable in bankruptcy, some tuition debts owed to schools may be included in a bankruptcy discharge. Bankruptcy laws can be complicated. If you are considering bankruptcy, the attorneys at John W. Lee, PC can help you make sure it is done right.

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