Debt to Parent for ‘Student Loan’ Wiped Out in Bankruptcy

By Daniel Gill

A loan to a student from her father for her education was discharged, or erased, by the student’s Chapter 7 bankruptcy, a Pennsylvania bankruptcy judge held.

Confronting a split in authority on the question, Thomas P. Agresti, U.S. Bankruptcy Judge for the Western District of Pennsylvania, followed the “narrow view” and determined March 7 that a parent’s loan isn’t excepted from bankruptcy discharge.

Thomas J. Nypaver took out a federal “Parent PLUS” loan for his daughter, Erin Nypaver, a music student at Seton Hill University. Erin signed a promissory note prepared by her father agreeing to repay him with interest.

Erin began making payments after graduating in 2014, but she defaulted. Her father sued in state court.

She filed Chapter 7 in 2016, which automatically stayed the state court litigation. After she received her discharge in bankruptcy, an order wiping out most of her debts, her father went back to state court and obtained a default judgment.

Erin moved to reopen the bankruptcy case and to determine the debt to her father was, in fact, discharged.

The court examined 11 U.S.C. §523(a)(8), the Bankruptcy Code section that provides that most student loans aren’t discharged.

The court ruled out two subparts. It wasn’t from a governmental unit or a non-profit company, and it wasn’t a qualified educational loan.

A “qualified educational loan” is determined by Section 221(d)(1) of the Internal Revenue Code. That section excludes loans from family members, including “ancestors.” The court said that “ancestors” includes parents.

Since it wasn’t an educational loan, the court had to determine whether the loan was “an obligation to repay funds received as an educational benefit, scholarship, or stipend.”

An obligation for an “educational benefit” is distinct from an “educational loan,” the court said. The loan to Erin from her father wasn’t the type of obligation meant for exception from the discharge under this section, like a scholarship or stipend, it held.

Lauren M. Lamb, Pittsburgh, represented Erin Nypaver. Thomas Nypaver was represented by Jason A. Spak, Pittsburgh.

The case is Nypaver v. Nypaver (In re Nypaver) , 2018 BL 77825, Bankr. W.D. Pa., 16-23381, 3/7/18 .

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com

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