The Catholic University of America

Summary of Federal Laws

Financial Aid Programs

Bankruptcy Reform Act of 1978 and 1990 and 1998 Amendments

Compliance Partners

Director of Enrollment Services, Business Systems
Registrar

11 U.S.C. § 101 et seq.

Title 11 U.S.C. § 523(a)(8), along with the 1990 amendments, prohibits the discharge of most student loans in bankruptcy, when the loans were obtained from the government or non-profit higher educational institutions. There is an exception for undue hardship and for loans that became due more seven years before the filing of the petition. The seven-year exception was eliminated for cases commenced after October 1, 1998, the effective date of the Higher Education Amendments of 1998, and thus borrowers will not be able to discharge their debts to educational institutions under the seven-year exception. An institution may be affected by the automatic stay (11 U.S.C. § 362(d)(1)), while the bankruptcy action is proceeding, and this prohibits the withholding of student transcripts to obtain payment. This action is also prohibited if the debt is actually discharged. For more on the issue of debt collection and student loans, go to the U.S. Department of Education Web site at http://www.ed.gov/offices/OSFAP/DCS/ that contains a guide to defaulted student loans.


Resources and Case law

For another case where the University prevailed against the fraudulent transfer theory see DeGiacomo v. Sacred Heart University, Inc. (In re Palladino), 2016 WL 4259787 (Bk.D.Mass., Aug. 10, 2016). Note: Case is on appeal from the Bankruptcy Court to the First Circuit. No. 17-1334. 

I find that the Palladinos paid SHU because they believed that a financially self-sufficient daughter offered them an economic benefit and that a college degree would directly contribute to financial self-sufficiency. I find that motivation to be concrete and quantifiable enough. The operative standard used in both the Bankruptcy Code and the UFTA is "reasonably equivalent value." The emphasis should be on "reasonably." Often a parent will not know at the time she pays a bill, whether for herself or for her child, if the medical procedure, the music lesson, or the college fee will turn out to have been "worth it." But future outcome cannot be the standard for determining whether one receives reasonably equivalent value at the time of a payment. A parent can reasonably assume that paying for a child to obtain an undergraduate degree will enhance the financial well-being of the child which in turn will confer an economic benefit on the parent. This, it seems to me, constitutes a quid pro quo that is reasonable and reasonable equivalence is all that is required.

Summary judgment shall enter in favor of SHU on counts II and IV of the complaint.

 

For the case on appeal to the First Circuit, see the July 19, 2017 amicus brief of the American Council on Education and 19 other Education Associations, in support of Sacred Heart University.  

For the proposition that payment of undergraduate tuition for a child is not a fraudulent transfer under bankruptcy case law, see Oberdick v. Shearer, 490 B. R. 687 at 712  2013 Bankr., LEXIS 1163, (U.S. Bank. Court for the Western District of Pennsylvania) (March 26, 2013)

 

While the Pennsylvania legislature [**60] has not yet enacted a statute that requires parents to pay for their children's post-secondary [undergraduate] educa-tion, this Court holds that such expenses are reasonable and necessary for the maintenance of the Debtor's family for purposes of the fraudulent transfer statute only. 2012 Bankr. LEXIS 5097, 2012 WL 5360956 at *10. This Court agrees with that conclusion. What is a "necessity" for purposes of family obligation law is not necessarily congruent with what should be considered a necessity for purposes of an action under PaUFTA. Even though there may not strictly speaking be a legal obligation for parents to assist in financing their children's undergraduate college education, in following Judge Deller's lead in the Cohen case, this Court has little hesitation in recognizing that there is something of a societal expectation that parents will assist with such expense if they are able to do so.


Bankruptcy Blog on Stern v. Marshall and cases that follow

July 14, 2011 NACUA Note: Student Bankruptcy and the Permissibility of Traditional Campus Collection Measures

 

 

 

 

updated to add ACE brief, 7-26-17