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Law School Violates Discharge Injunction
August 24, 2009
Topic: Bankruptcy
After the petition was filed, Novus notified the debtor by email that, if the debt he owed was liquidated through bankruptcy, they would not issue his degree or “validate, certify, and or verify” the debtor’s graduate status to potential employers. In response, the debtor filed a motion for contempt and sanctions for the school’s violation of the Bankruptcy Automatic Stay. He alleged that he had completed all coursework identified by the school’s graduation requirements but had not been given his degree and transcript because the school was trying to collect the discharged tuition balance.
The debtor explained that he had attempted to pay his tuition, while he was enrolled in law school. He had been making monthly installment payments. However, according to the debtor, there were hidden costs of attendance that he had not anticipated, including exam fees and the accrual of interest on the tuition balance. Even though he made the monthly payments, his balance continued to grow, and he was unable to pay it in full. This, along with other mounting debt, forced him to file for bankruptcy.
A bankruptcy discharge creates an injunction prohibiting the “commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such [discharged] debt as a personal liability of the debtor, whether or not discharge of such debt is waived.” Bankruptcy Code, § 524(a)(2). While there is no private right of enforcement of this injunction, a debtor can seek relief for a violation of the order through contempt proceedings and sanctions may be awarded.
In this case, at issue before the court was whether the debt was properly discharged and, if so, whether the law school was in contempt of the injunction.
Generally, student loan obligations are presumptively non-dischargeable. Therefore, if the school were attempting to collect a non-dischargeable student loan, it would not have been in violation of the injunction. However, the court ruled that this debt was dischargeable because it was distinguishable form a student loan. This was a balance of unpaid tuition, not an “educational benefit overpayment” or an “obligation to pay funds received.” The fact that the debtor continued attending class online and took the required exams even though he owed the school money did not create a loan. This was simply a debt owed, which is not excepted from discharge under § 523(a)(8). Therefore, the school was prohibited from taking any action to collect the debt once the petition was filed (automatic stay) and after the debt was discharged (discharge injunction).
Finally, the school’s refusal to issue and certify the debtor’s degree violated the discharge injunction. The sole purpose of the school’s actions was to “compel the payment of a pre-petition debt.” Therefore, the court found Novus in contempt for violating the discharge injunction. It ordered Novus to pay a sanction of $10,000 within thirty days, unless it issued debtor’s degree and began validating it for employers.
This case is an example of one of the many issues that can arise from the filing of a bankruptcy petition and the successful discharge of debt. Creditors do not easily yield their rights to collect debts owed to them and will take action to recover. If you are considering bankruptcy, contact Arnold & New today, so we can discuss your options and ensure that something like this does not happen to you.
