By: Andrew Brown
St. John’s Law Student
American Bankruptcy Institute Law Review Staffer
Educational loans made, insured, or guaranteed by a governmental unit are not dischargeable in a chapter 7 bankruptcy case, unless the debtor obtains a hardship determination.[1] Thus, it is very difficult to discharge student loans through a bankruptcy case. This is true even if the loan is made, insured, or guaranteed by a foreign governmental unit. In the case of In re Mulley, the Bankruptcy Court for the Central District of California determined that government guaranteed student loans, made pursuant to the Canada Student Loans Act (“CSLA"), were non-dischargeable under the United States Bankruptcy Code.[2]
Susan Mulley, the debtor, entered into a series of guaranteed Canada Student Loan (“CSL”) agreements with the Canadian Imperial Bank of Commerce (the “Bank”).[3] Pursuant to these CSL agreements, the Bank disbursed a total of CAD 56, 140 (Canadian dollars).[4] Once Ms. Mulley ceased to be a full-time student, she became liable to pay the interest that had been accruing on the loans.[5] Ms. Mulley did not make these payments, and the interest was added to the principal amount of the loans.[6] Consequently, the Bank demanded that Ms. Mulley pay, in full, her obligation to the Bank, which had grown to CAD 65,328.70.[7] Ms. Mulley failed to maintain these payments, and the Bank submitted a claim for loss to the Canadian government (“the Crown”).[8] Thereafter, the Crown paid the Bank a sum of $51,680.91,[9] and Ms. Mulley’s outstanding loan became a debt to the Crown.[10] Ultimately, the Crown obtained a Canadian judgment against Ms. Mulley for CAD 62,577.89.[11] On September 2, 2010, The Attorney General of Canada successfully obtained a judgment enforceable against Ms. Mulley in the state of California in the amount of $71,830.16.[12] Ms. Mulley’s wages were garnished, and the balance due was reduced to $59,051.49.[13]
On May 11, 2015, Ms. Mulley filed a voluntary petition for relief under Chapter 7 of the United States Bankruptcy Code, which stayed the garnishment on her wages.[14] Ultimately, the bankruptcy court found that Ms. Mulley’s outstanding student loan debt was not dischargeable.[15] According to the court, a “governmental unit,” as defined by 11 U.S.C. § 101(27), included foreign states, which included the Canadian government.[16] In its opinion, the court explained that educational loans guaranteed by a governmental unit are not dischargeable unless the debtor obtains a hardship determination.[17] Ms. Mulley did not pursue that option.[18]
In re Mulley affirms that foreign entities are included within “government units” for purposes of § 523(a)(8)(A).[19] This ruling protects foreign governments and banks from students looking to take out foreign loans to finance their education and then subsequently seeking to have those loans discharged through bankruptcy proceedings in the United States. By offering this protection, In re Mulley advances the Congressional intent at the heart of § 523(a)(8)(A), i.e., protecting the government from bad-faith borrowers who intend to gain the benefit of an education and then avoid paying their debt by having such debt discharged by filing for bankruptcy.[20]
[1] In re Mulley, No. 2:15-AP-01446-RK, 2016 WL 1445800, *1, at *4 (Bankr. C.D. Cal. Apr. 11, 2016).
[2] Id. at *4.
[3] Id. at *1.
[4] Id.
[5] Id.
[6] Id. at *2.
[7] Id. Pursuant to the CSLA, the Bank had proposed a loan consolidation agreement, which Ms. Mulley failed to enter. Id. Under Canadian law, Ms. Mulley’s failure to enter the proposed consolidation agreement caused the total principal amount of all the loans, and the interest that had accrued, to become due on the first day of the seventh month after which Ms. Mulley ceased to be a full-time student. Id.
[8] Id.
[9] Id.
[10] Id. at *3.
[11] Id.
[12] Id.
[13] Id.
[14] Id.
[15] Id. at *4.
[16] Id.
[17] Mulley, 2016 WL 1445800, at *4; See 11 U.S.C. § 523(a)(8)(A).
[18] Mulley, 2016 WL 1445800, at *4.
[19] Formerly 11 U.S.C. § 523 (a)(8).
[20] 3 Norton Bankr. L. & Prac. 3d § 57:52; See also In re Ford, 22 B.R. 442, 444 (Bankr. W.D.N.Y. 1982); In re Boylen, 29 B.R. 924, 926 (Bankr. N.D. Ohio 1983).