When is a “Student Loan” a “Student Loan”?

Under § 523 of the Bankruptcy Code, to discharge student loans a debtor must show that “accepting such debt for discharge… would impose an undue hardship”. 11 U.S.C. § 523(a)(8).  I often tell debtor clients that in order to discharge student loans, you have to either be dead, or on death’s front door.


11 U.S.C. § 523(a)(8)

The issue of whether a “student loan” is dischargeable in a bankruptcy is relatively clear under § 523 and the court developed “Bruner Test“[1] or the Eighth Circuit’s “Totality-of-the circumstances Test“[2].


Section 523 provides as follows.


(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—


(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

Section 523(a)(8) protects four categories of educational loans from discharge: (1) loans made, insured, or guaranteed by a governmental unit; (2) loans made under any program partially or fully funded by a government unit or nonprofit institution; (3) loans received as an educational benefit, scholarship, or stipend; and (4) any “qualified educational loan” as that term is defined in the Internal Revenue Code.


In the wake of the failure and closing of multiple for profit colleges and universities, there has been a developing question as to what qualifies as a “student loan”, particularly under subsection B – the fourth category protected from discharge. Clearly, under § 523(a)(8)(A) there is not a dispute as to whether traditional student loans related to education at nonprofit institutions are “student loans” for purposes of § 523. But what is a “qualified education loan as defined in Section 221(d)(1) of the Internal Revenue Code of 1986?


26 U.S.C. § 221(d)

Section 221(d)(1) of the Internal Revenue Code of 1986 provides as follows:

(d)       Definitions For purposes of this section—


  1. Qualified education loan: The term “qualified education loan” means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses—


(A) which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,

(B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and

(C) which are attributable to education furnished during a period during which the recipient was an eligible student.

Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term “qualified education loan” shall not include any indebtedness owed to a person who is related (within the meaning of section 267(b) or 707(b)(1)) to the taxpayer or to any person by reason of a loan under any qualified employer plan (as defined in section 72(p)(4)) or under any contract referred to in section 72(p)(5).

As is the case with most bankruptcy code and tax code sections one term is defined by a reference to another defined term.  Here, “qualified education loan” is a loan which is incurred “to pay qualified higher education expenses”. So what are “qualified higher education expenses”?


Subsection (d)(2) defines   “qualified higher education expenses” as follows:

(2) Qualified higher education expenses: The term “qualified higher education expenses” means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) at an eligible educational institution, reduced by the sum of—

(A) the amount excluded from gross income under section 127, 135, 529, or 530 by reason of such expenses, and

(B) the amount of any scholarship, allowance, or payment described in section 25A(g)(2).

For purposes of the preceding sentence, the term “eligible educational institution” has the same meaning given such term by section 25A(f)(2), except that such term shall also include an institution conducting an internship or residency program leading to a degree or certificate awarded by an institution of higher education, a hospital, or a health care facility which offers postgraduate training.

The Definition of “qualified higher education expenses” leads to two more questions. First what does “cost of attendance” mean; and second, what is “an eligible education institution”.


With respect to the definition of “cost of attendance”, I have included the full version of Section 472 of the Higher Education Act of 1965, however generally it includes the following:


  • Tuition and fees;

  • Rental of equipment, materials, or supplies required of all students in the same course of study;

  • An allowance for books, supplies, transportation, and miscellaneous personal expenses (including amounts for a personal computer); and

  • Room and board.


The Seventh Circuit, among others, has evaluated whether a loan is a “qualified educational expense” using the stated purpose for the loan at the time it was obtained, rather than focusing on how the actual loan funds were used by a borrower. See In re Sokolik, 635 F.3d 261, 266 (7th Cir.2011); Murphy v. Pennsylvania Higher Educ. Assistance Agency (In re Murphy), 282 F.3d 868, 870 (5th Cir.2002).  This methodology is commonly referenced as the “substance of the transaction test“ which recognizes the aims of §523(a)(8) to exclude entities that make educational loans from the effect of a debtor’s discharge. Tift County Hospital v. Nies (In re Nies), 334 B.R. 495, 501 (Bankr.D.Mass.2005).

Section 523(a)(8) is concerned with the circumstances surrounding the origination of the loan, rather than what benefits the debtor may have derived. In re Wills, 2010 WL 1688221 (S.D.Ind. April 23, 2010). Thus, “rather than trying to determine whether a computer purchased with loan money was used for schoolwork, personal use or some combination of both,” a bankruptcy court reviewing a § 523(a)(8) case “need only ask whether the lender’s agreement with the borrower was predicated on the borrower being a student who needed financial support to get through school.” In re Sokolik, 635 F.3d at 266

Based on the “substance of the transaction test” a variety of bankruptcy courts have determined that even funds used to pay living or social expenses are “qualified educational expenses” and therefore not dischargeable. Murphy, 282 F.3d at 870. See also In re Sokolik, 635 F.3d at 266; In re Noland, 2010 WL 1416788, *3–4 (Bankr.D.Neb. March 30, 2010); In re Hayes, 2006 WL 4481999, *4 (Bankr.D.Md. October 11, 2006); In re Nies, 334 B.R. at 502; In re Riley, 2005 WL 6443619, *5 (Bankr.N.D.Tex. June 17, 2005); In re Hamblin, 277 B.R. 676 (Bankr.S.D.Miss.2002); In re Roberts, 149 B.R. 547, 551 (C.D.Ill.1993); Barth v. Wisconsin Higher Educ. Corp. (In re Barth), 86 B.R. 146, 148 (Bankr.W.D.Wis.1988)

“An eligible education institution” is an institution which is described and eligible to participate in a program under Title IV of the Higher Education act of 1965 as amended. 26 U.S.C. § 25A(f)(2). In re Wills, 2010 WL 1688221, *7 (S.D.Ind. April 23, 2010).

Generally, Title IV of the Higher Education Act of 1965 covers the administration of the United States federal student financial aid programs. In fact, it was the Department of Education’s determination that ITT Educational Services, Inc. could no longer enroll students using federal financial aid funds (under IV of the Higher Education Act of 1965)[3] that was a big part of ITT’s ultimate undoing.



A “student loan” is a “student loan” when it is a “qualified education loan”, which is to say that the purpose of the loan was to fund “qualified higher education expenses” for the “cost of attendance” of a student at an “eligible education institution”.

The good news is that under § 523(a)(8) the initial burden is on the creditor to establish the existence of the debt and to demonstrate that the debt is non-dischargeable as a “student loan”. Raymond v. Northwest Educ. Loan Ass’n (In re Raymond), 169 B.R. 67, 69–70 (Bankr.W.D.Wash.1994), cited in In re Weldon, at *2; The Cadle Co. v. Webb (In re Webb), 132 B.R. 199, 201 (Bankr.M.D.Fla.1991). Accord In re Stone, 199 B.R. 753, 769 (Bankr.N.D.Ala.1996); In re Bachner, 165 B.R. 875, 881 (Bankr.N.D.Ill.1994); In re Phillips, 161 B.R. 945 (Bankr.N.D.Ohio 1993); In re Ealy, 78 B.R. 897 (Bankr.C.D.Ill.1987); In re Keenan, 53 B.R. 913 (Bankr.D.Conn.1985) (placing burden of proving that loan qualifies as a student loan “is consistent with the parties’ relative access to information”).

[1] Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395, 296 (2d Cir. 1987).

[2] Long v. Educ. Credit Mgmt. (In re Long), 322 F.3d 549, 554-55 (8th Cir. 2003).

[3] http://www.ed.gov/news/press-releases/department-education-bans-itt-enrolling-new-title-iv-students-adds-tough-new-financial-oversight

Fraudulent Transfers – Extended Look Back Period, FDCPA, and The IRS

Section 544(b) of the Bankruptcy Code enables a bankruptcy trustee (or Debtor in Possession) to avoid any transfer of an interest of the debtor in property that is voidable under “applicable law” by a “qualified creditor”. This kind of action by a trustee is often referred to as an “avoidance action”.



Before a trustee can maintain an avoidance action, the trustee must demonstrate the existence of a qualified creditor – meaning a creditor that: (a) has a right to avoid the transfers; and (b) holds an “allowable” unsecured claim.


Assuming that the trustee can demonstrate the existence of a qualified creditor, the trustee we then turn to the question of what is the “applicable law”? The scope of “applicable law” is undefined and there have been recent developments in this area.


Usually, a trustee seeking to pursue an avoidance action will have the option of using the longer of the two-year statute of limitations found at Section 546(a)(1) of the Bankruptcy Code, or the applicable state fraudulent transfer statute of limitations provision – which under  Ind. Code § 32-18-2 is four (4) years. The applicable statute of limitations is often referred to as the “look back period”.


Transactions that occurred more than four (4) or even six years (6) before a bankruptcy filing, may still be subject to an avoidance action for recovery of a fraudulent transfer.


The extended look back period is good for trustees (who earn a percentage of whatever the recover) as well as creditors (who otherwise may receive nothing from a bankruptcy filing).  However, the extended period is often unfortunate for the defendants of the avoidance actions that often end up paying twice for the same transactions.


Extended Look Back Periods

The extended look back periods usually is the result of either the statute of limitations provision found in the Federal Debt Collection Procedures Act (FDCPA), 28 U.S.C. §§ 3001-3308 (six years), or the recovery under the Internal Revenue Code (IRC), 26 U.S.C. §§ 6501, 6502 (10 years). However, whether courts will approve the use of a longer statute of limitations as authorized under an “applicable law” does not have a clear answer.


FDCPA – Six (6) year look back period

Among other things, the FDCPA permits the recovery of judgment debts owed to the United States and enables, as part of such recovery, the avoidance of certain transactions. The FDCPA provides the federal government with a procedure to recover on or secure obligations owed to it.  The procedure provided under the FDCPA relieves the federal government of the need to rely on and comply with the multitude of various state substantive and procedural laws. Under FDCPA section 3001(a) acts as “the exclusive civil procedures for the United States (1) to recover a judgment on a debt; or (2) to obtain, before judgment on a claim for a debt, a remedy in connection with such claim.” U.S.C. § 3001(a). The FDCPA does not contain a private right of action and is only applicable in situations where the United States (or federal agency) is attempting to collect a “debt” as defined under the FDCPA. The FDCPA contains a six-year look back period for, among other things, pursuing fraudulent transfer claims authorized under the FDCPA. (28 U.S.C. § 3306.)


The lack of a private right of action has been relied upon by various courts in finding that the FDCPA is not “applicable law” under section 544 of the Bankruptcy Code. See e.g. In re Mirant Corp., 675 F.3d 530 (5th Cir. 2012) (holding that both the statutory language and the legislative history of the FDCPA indicate it is not “applicable law” under section 544(b)); see also In re Bendetti, 131 F. App’x 224 (11th Cir. 2005) (confirming bankruptcy court finding in two separate proceedings – an avoidance proceeding and a discharge proceeding – that the Chapter 7 Trustee’s actions were barred by the state statute of limitations and that the Chapter 7 Trustee could not sue the six-year statute of limitations provided by section 3306 of the FDCPA because he was a private party.


Several other courts conclude the opposite and permit the debtor’s estate to use the FDCPA as “applicable law.” The opinions that permit the debtor’s estate to do so, discussed below, lack the rigor and exhaustive approach taken by the courts above. See In re Pfister, 2012 WL 1144540 (Bankr. D.S.C. Apr. 4, 2012)(holding that “because the debtor was indebted to the IRS at the time of the transfer”, the Chapter 7 Trustee could use the look back period provided under the FDCPA and was not limited to the aggregate amount of the IRS claims but could recover the entire value of the transfer); See also In re Porter, 2009 WL 902662 (Bankr. D.S.D. Mar. 13, 2009) (holding that the Trustee could step into the shoes of the SBA); In re Walter, 462 B.R. 698, 703-04 (Bankr. N.D. Iowa 2011) (holding that  the United States did not need to be owed a debt the at the time of the alleged fraudulent transfer for the FDCPA to be “applicable law.”).


IRS – Ten (10) year look back period

Recently courts have held that under section 544(b), the trustee may use the statute of limitations available to any actual creditor of the debtor as of the commencement of the case.  This is significant because if the IRS is a creditor, the applicable look back period could be as long as ten (10) years. See In re Polichuk, 2010 WL 4878789 (Bankr. E.D. Pa. Nov. 23, 2010)(“Finding that the IRS has at least a ten-year lookback period, and because the Trustee may step into the shoes of the IRS, she may seek to avoid transfers that occurred as far back as January 31, 1998.”);  see also In re Kipnis (2016 WL 4543772); In re Republic Windows & Doors, LLC, 2011 WL 5975256 (Bankr. N.D. Ill. Oct. 17, 2011); In re Greater Se. Cmty. Hosp. Corp. I, 365 B.R. 293, 297-315 (Bankr. D.D.C. 2006), and In re Greater Se. Cmty. Hosp. Corp. I, 2007 WL 80812 (Bankr. D.D.C. Jan. 2, 2007).



The applicable statute of limitations or look back period may be much longer than the two (2) to four (4) years provided under most state statutes and the mere passage of such time periods no longer provides the comfort that an avoidance action for recovery of a fraudulent transfer is barred.  As a result, debtors’ counsel, creditors’ counsel, and trustees should look at the creditors involved in a matter when making a determination as to the applicable look back period.


Florida Bankruptcy Court Permits Compensation for Additional Work Following Objection to Fee Application

A recent decision from the Bankruptcy Court for the Middle District of Florida (In Re Stanton,  No. 8:11-BK-22675, 2016 WL 6299750 (Bankr. M.D. Fla. Oct. 26, 2016)) refuses to create a bright-line rule that denies additional compensation once an objection has been filed to a professional’s fee application.   The decision in Stanton appears to be in conflict with Baker Botts v. ASARCO, where the United States Supreme Court held that Bankruptcy Code § 330(a) does not authorize attorney’s fees for work performed defending a fee application because that work is not performed for the estate.

In Stanton, attorneys serving as special counsel for a Chapter 7 Trustee pursued fraudulent transfer claims against the Debtor’s ex-wife. The attorneys for the Trustee ultimately settled the claims on the bankruptcy estate’s behalf. Under the settlement, the bankruptcy estate recovered $3.5 million in proceeds from the sale of certain stock, as well as real property in California that eventually sold for nearly $3 million.

The settlement was approved and thereafter the Trustee’s attorneys filed an Application for Compensation (the “First Application”) to which the United States Trustee (“UST”) objected on the basis that 1) the First Application failed to provide any meaningful breakdown on how the attorneys spent the 900 hours in the main bankruptcy case; (2) the First Application  failed to describe how labor was divided among attorneys in the fraudulent transfer proceeding or demonstrate that the lawyers did not unnecessarily duplicate services; and (3) the First Application failed to provide any meaningful narrative regarding the results obtained from the Trustee’s attorneys’ services. Even though the First Application met the local rule’s requirements for a Chapter 7 application, the UST  insisted on the level of detail required for a fee application in a chapter 11 case.

Based on the UST’s objection to the First Application the Trustee’s attorneys opted to supplement the First Application.  To do so, an 18 page supplement that addressed the issues raised by the UST in its objection to the Application was prepared and filed.  At a hearing on the First Application, the UST conceded that the supplement to the First Application resolved the information issues raised by the objection that was filed to the First Application.  Based on such concessions, the Court approved an interim distribution on the First Application.

A second Application for Compensation was filed (the “Second Application”) seeking compensation, in large part, for the time spent in supplementing the First Application.  Naturally, the UST objected to the Second Application on the basis that under the Baker Botts decision a bright line rule had been created that spent in defending a fee application was unrecoverable under § 330(a).

The Bankruptcy Court for the Middle District of Florida found that the UST’s interpretation of Baker Botts was too broad and that the supplement to the First Application was time spent in preparing the fee application and allowed “the trustee to understand the fees incurred” which constituted “services rendered to the bankruptcy estate” and therefore provided a benefit to the estate.


In summary, the Court’s conclusion that “the touchstone, then, for determining whether fees are recoverable under Baker Botts is not when the fees were incurred (i.e., before or after an objection) but rather whether they were incurred in service to the estate”, appears to soften or clarify the holding of the Baker Botts decision just a bit and refuses to adopt a bright-line rule that once an objection has been filed an attorney can no longer recover any fees related to an application for compensation.