With Bankruptcy Discharge, School Cannot Deny Transcript

Overland Park Bankruptcy Attorney

Can a school refuse to issue a transcript to a debtor who had wiped out his outstanding balance owed to the school in a bankruptcy case?  No.  A recent case demonstrates the power of the bankruptcy discharge in dealing with all types of collateral issues that might come about from the wiping out of debts in a case.

In In re Moore, 407 B.R. 855, 861 (Bankr. E.D. Va. 2009), the United States District Court for the Eastern District of Virginia found that Novus Law School violated a discharge injunction by refusing to issue a transcript or award a degree to Moore, a law student, until he paid his outstanding tuition balance, which had been discharged in Moore’s chapter 7 proceeding.

The school in question here was an internet, non-accredited institution.  The debtor had completed his program at the school but still had an outstanding balance (about $6000) from his tuition bill (which was not part of a federally-insured loan obligtion).  The school inappropriately told Moore that they would not grant him a degree or issue him a transcript until his tuition was paid, even though the tuition was to be wiped out in the bankruptcy.

Moore, undeterred, filed a motion for contempt and sanctions against Novus, claiming that they had no right to refuse him his transcript or certify his graduate status to prospective employers, since such conduct was a violation of the bankruptcy discharge.  Novus disagreed.  The Court first had to find out if Moore’s debt was in fact a “student loan” that did not qualify for discharge under the bankruptcy rules.

Applying 11 U.S.C. Section 523(a)(8), the court found that the loan was not an educational debt within the meaning of the Bankruptcy Code.  Why?  Because it was not an “educational benefit overpayment” or a loan made by a governmental unit as a part of a government-funded program.  It was also not “an obligation to repay funds received as an educational benefit.”  Thus, the debt was discharged in the bankruptcy.

The next step in the analysis was deciding whether Novus’s actions (refusing to issue a transcript) were “attempts to collect a debt”.  The Court found that they were.  By refusing to issue Moore a transcript, the school was basically trying to compel him to pay his discharged debt.  This is the majority view.

By analogy, a good argument can be made that any attempt by a creditor, whose debt has been discharged, to compel a debtor into paying a discharged debt is a violation of the discharge injunction.

Refusing to release property, holding security deposits for debt collection purposes, stonewalling on information, denying rightful services, and any number of similar actions may all constitute violations of the discharge injunction.  Debtors should be aware of their rights, and bring such behavior to the attention of their bankruptcy attorney.

Read More:  Redemption Of Secured Collateral In A Chapter 7 Case