by A debt incurred when a debtor refinances a student loan through a non-institutional lender may be nondischargeable in bankruptcy without regard to whether the debt itself constituted a qualified educational loan. Juber v. Conklin (In re Conklin), No. 19-91 (W.D. N.C. Apr. 6, 2020).
The debtor, Lina Conklin, financed her college education, in part, through private student loans. After she graduated, Ms. Conklin became engaged to the creditors’ son, Christopher Juber. At that time, she owed over $100,000 in private student loans at an interest rate of 9.5%. In an effort to assist the as-yet-unmarried couple financially, Christopher Juber’s parents, Kevin and Linda Juber, paid off Ms. Conklin’s student loans using their home equity line of credit (HELOC) at an interest rate of 1.99%. In exchange, Ms. Conklin orally agreed to make biweekly payments to the Jubers in the amount of $500, and, when the Jubers sold their home, Ms. Conklin agreed that she and their son would refinance the remaining principal on the HELOC loan. When Ms. Conklin later broke off her engagement with their son, the Jubers and Ms. Conklin entered into a promissory note under which Ms. Conklin agreed to repay the loan over ten years at 9.5% interest.
After making payments on the Note for three years, Ms. Conklin filed for chapter 13 bankruptcy. The Jubers filed a claim for almost $70,000, which they described as representing a “Loan provided to refinance student loans.” The Jubers objected to Ms. Conklin’s proposed plan under which she proposed to pay a federal student loan outside the plan and treat the Jubers’ loan as general unsecured. They filed an adversary proceeding seeking a declaration that the debt was a non-dischargeable educational loan under section 523(a)(8)(B). They also objected to the plan as filed in bad faith.
The bankruptcy court found that the original private loans were qualified educational loans and went on to address whether the subsequent loan from the Jubers was non-dischargeable. The court was persuaded that the loan was dischargeable by the facts that the loan, made post-graduation, was not made to further Ms. Conklin’s education but to relieve her and their son of debt. The court reasoned that Congress’s purpose of incentivizing and protecting student lenders would not be advanced by a finding that the Jubers’ loan was nondischargable. The bankruptcy court, therefore, granted summary judgment in favor of Ms. Conklin.
On appeal to the district court, the Jubers argued that the bankruptcy court erred in analyzing their loan to Ms. Conklin under the standards for a qualified educational loan. Rather, the Jubers argued that the bankruptcy court, once it determined that the underlying loans were educational loans, should have looked only at whether the Jubers’ subsequent loan was intended to refinance those earlier student loans.
The district court began its analysis with the language of section 523(a)(8)(B) and IRC section 221(d), which include in the definition of a qualified educational loan, “indebtedness used to refinance indebtedness which qualifies as a qualified educational loan.” Applying rules of statutory construction set forth in In re Hurlburt, 925 F. 3d 154 (4th Cir. 2019), under which a court should consider “(1) the most natural reading of the statutory language; (2) the effect of the prefatory language; and, (3) the statute’s cross-reference to another provision of the bankruptcy code,” the district court agreed with the Jubers that the proper inquiry was not whether their loan to the debtor was for educational purposes, but whether its purpose was to refinance loans that were educational loans. Because the statutory language was clear, the court found that the bankruptcy court’s discussion of legislative history and congressional policy underlying bankruptcy treatment of student loans, while accurate, was off-point. The language of section 523(a)(8)(B) and its reference to IRC section 221(d), made clear that the question of refinancing followed upon a finding that the original loan was for educational purposes.
The district court rejected Ms. Conklin’s distinction between institutional lenders and individual lenders as being irrelevant to the inquiry of whether the refinance provision of section 523(a)(8)(B) applied. The court found rather, that the only distinction made in IRC section 221(d) concerned whether the party refinancing the educational loan was related to the student loan debtor, in which case, the provision would not apply. Likewise, the Jubers’ motivation in lending the money was irrelevant. In short, the court concluded that “[s]o long as the loan being refinanced is a ‘qualified education loan,’ then the refinancing loan may still be considered nondischargeable debt under 11 U.S.C. § 523(a)(8)(B) whether or not it would itself be independently considered an ‘educational loan.’”
The court noted, however, that in finding that the Jubers’ loan was not itself an educational loan, the bankruptcy court declined to decide the questions of whether the loan was a refinance of the original student loans, and, if so, whether it was otherwise dischargeable as imposing an undue hardship on the debtor. It, therefore, remanded to allow the bankruptcy court to address those questions.