Just last month, the Bankruptcy Cave reported upon a Southern District of Texas case in which a debtor was denied discharge of a debt owed to an old (and likely former!?!) friend from church who had been required to pay off a student loan made to the debtor which the friend had guaranteed.  Today we report another case involving friends and family and non-dischargeable student debt from the U.S. Bankruptcy Court for the Eastern District of Michigan.

The case, Ramani v. Romo (In Re Romo), Ad. Pro. No. 17-2107-dob (link for you here), was recently resolved by way of summary judgment for the plaintiffs, the debtor’s former in-laws.  As set forth in the May 14, 2018 opinion of Judge Daniel S. Opperman, the debtor entered her marriage to the plaintiffs’ son with considerable student debt. The U.S. Department of Education offered to forgive a significant amount of the debt in return for an immediate payment of $105,000.

The plaintiffs were able to provide the funds necessary to retire the debt and did so in 2012 by way of a scarcely documented loan which the debtor was to repay at the rate of $400 every two weeks. Over several years, the debtor repaid $21,550. Also, during that time, the debtor’s marriage to the plaintiffs’ son ended as did her twice-monthly payments to the plaintiffs. The plaintiffs sued in state court and took an $84,312 judgment against the defendant in April 2017.  In July 2017, the debtor filed for relief under Chapter 7.

Importantly, as it turned out, the plaintiffs’ complaint included a detailed description of the purpose of the loan, reciting that the original debt was owed to the Department of Education and that the loan was made by way of a check from the plaintiffs, payable to the department. The complaint also described the history of payments made by the debtor and her refusal to pay the balance of the loan. The debtor did not answer the complaint and a default judgment was entered for the plaintiffs. The debtor did not appeal.

The plaintiffs filed an adversary proceeding in the bankruptcy, challenging the dischargeability of the debt owed to them. In his opinion granting summary judgment to the plaintiffs, Judge Opperman held that the debtor was collaterally estopped by the state court judgment from challenging the existence or enforceability of the loan or the plaintiffs’ assertion that the loan was for educational purposes. “While she makes excellent arguments supporting her position, the (state court judgment) answers all these questions and closes the door to her because of collateral estoppel.”

Utilizing the facts set forth in the state court complaint, Judge Opperman concluded that the loan was a “qualified education loan” as defined by 26 U.S.C. § 221(d)(1), which specifically includes loans made to refinance student debt, and therefore excepted from discharge under 11 U.S.C. §523(a)(8)(B), which exempts student loans that are neither made nor guaranteed by a governmental agency.

Finally, Judge Opperman notes that while 26 U.S.C. §221(d)(1) excludes debts owed to a “related person,” the term, as defined by 26 U.S.C. 267 (b) and (c), limits the exclusion to debts owed to one’s “brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants.” Notably excluded from the exclusion are a debtor’s former mother-in-law and father-in-law.

So, for a practitioner representing a lender seeking to collect a debt which may be non-dischargeable in the event of the defendant’s subsequent bankruptcy, it is important to allege facts in the collection action that will support a later determination of non-dischargeability.

On the other hand, for a practitioner representing a borrower with hopes of obtaining a discharge, you can’t let a creditor take a judgment in state court and only seek bankruptcy protection in response to collection activity without being stuck with the facts as established in the collection suit.

And for over-extended student loan borrowers, if you’re going to hit someone up to refinance your debt, get it from your own parents or well-to-do sister, not your in-laws.