With many readily available offers for easy credit at their disposal and a level of freedom they never experienced before, getting in trouble with debt is a right of passage for a large number of college students. Some even experience their first bankruptcy before they graduate with their degree.
Unpaid tuition is a frequent occurrence on college campuses, since colleges will let students take classes while awaiting their financial aid and student loan funding. If the funding never comes in, the loan documents never are completed or the student never signs the check for the loan, the student carries an open balance on their education and it becomes a legitimate debt. This debt may become subject to collection proceedings if left unpaid for an extended period or if the student drops out of the school. Some schools require students to sign a promissory note before they leave stating they are responsible for repayment of the debt and the school will withhold transcripts until the debt is repaid.
Bankruptcy allows claimants to include any legitimate debt in a repayment plan or discharge, with certain exceptions. Educational loans are one of them. Unpaid tuition can be included within a bankruptcy. Depending on whether the bankruptcy is a Chapter 7 or a 13, the college will have to either take what the court determines to be a fair settlement and repayment plan, or take nothing as part of a Chapter 7 discharge.
Legal Action By Colleges
Some colleges have tried to sue former students who have attempted to include unpaid tuition as part of their Chapter 7 discharge. In 2000, Cazenovia College sued Kevin Renshaw and The College of St. Rose sued David W. Regner, both former students [222 F3d 82 (US Court of Appeals for the Second Circuit, 2000)]. Both colleges had allowed these students to continue in their classes despite the fact both students had refused to pay their tuition when it came due. When the students filed bankruptcy under Chapter 7 liquidation guidelines, they included their unpaid tuition in their bankruptcy. The colleges in both cases disputed the inclusion of the tuition, arguing that by permitting these students to attend classes after not paying their tuition, they had extended them a loan--an educational loan--meaning it could not be included in the bankruptcy.
The courts reviewed all of the documents regarding the students’ tuition, payment and financial aid. They could find no promissory note between the students and the schools regarding the unpaid amounts. In addition, the courts noted that the colleges could have chosen to refuse classes to the students, but chose not to and did not come to any additional agreement with the students before allowing them to continue. Because there was no promissory note or written agreement of any kind regarding a loan or an extension of credit in exchange for the additional classes, the courts ruled in favor of the students. The unpaid tuition was included in the bankruptcies and subsequently discharged. Since the courts discharged the students’ debts, the schools were unable to continue legally withholding their transcripts.