Punitive Scholarship Fines in my 13 repayment

[fldoc]

I'm about 10 months into my 13 we filed in FL. I received a scholarship in Medical School for $48k that stipulated I practice in rural GA upon completion of training. Since I failed to practive in rural GA, I agreed to repay the State of GA the terms of the contract which call for "triple damages", or $144,000. I have repaid roughly $40k but the State of GA came forward in my 13 and claimed $104k. I am consulting with my attorney about objecting to this amount but I wanted to seek other opinions about my options. Do I have any basis for objecting to this $104k what is essentially a fine since I am in 13 or do I simply have to eat it? Thanks a lot.

[despritfreya]

I do not see what you would be objecting to. You violated a contract that has a liquidated damage clause (not a fine) either under state/federal law or simply as a "negotiated" term. You breached the contract therefore, I would imagine, the other side is entitled to the benefit of its bargain. Further, since this is an educational benefit I doubt it will be discharged without a separate "hardship" finding. Of course, this is my "gut opinion" and without doing some extensive research, I cannot say for sure. Maybe there is an Entz White type argument that the damage clause is an impermissible penalty - don’t know.

Edt: Maybe that portion of the funds utilized for education are non-dischargeable but the balance, which was not an "educational benefit" is? Maybe such is a negotiating tool.

And. . . where are my manners? Welcome to the Forum.

Des.

[justbroke]

Definitely work with your attorney. The question is whether this is a fine within the "non-dischargeability" meaning under 11 USC 523 (which lists exceptions to discharge), whether this "penalty" would still be an "educational" loan, or whether it's nothing more than an executory contract. I'm not an attorney so I can't tell you, with any legal authority, how that portion (the penalty part) could be classified. I personally believe it's either a penalty or it's an executory contract. Executory contracts are dischargeable in bankruptcy. You breached when you did not perform under the terms of the contract invoking the penalties.

They probably have a claim for damages for non-performance under the employment contract (if such claim is the claim of an employee for damages resulting from the termination of an employment contract, 11 USC 502 describing claims). That would be the amount "not" used for education.

I do not know if you would be in a 100% Chapter 13, so I can't say whether you'd still end up paying their (allowed) claim over the life of the Chapter 13.

Since you are so far along in the Chapter 13 (10 months), major questions come to mind! Did you list this creditor in your schedules? Did the creditor file a claim? How much did you list the claim for... $48K? If the creditor filed a claim, how much did they put in their claim... 48K? Are you in a confirmed Plan?

Segal provides a good example of a loan that is not subject to § 523(a)(8). In Segal, a nonprofit hospital provided a low-interest loan to pay off a physician’s student loans as an inducement to employment. The employment contract contained a provision in which the physician agreed to repay the hospital. After the physician filed a bankruptcy petition, the hospital sought to invoke § 523(a)(8) to protect its loan under the contract. The Court of Appeals held that “loans made pursuant to the terms of an employment contract which are used, in turn, to repay educational debt are not, themselves, non-dischargeable educational loans within the meaning of 11 U.S.C. § 523(a)(8).” In re Segal, 57 F.3d at 350.

While Segal is not directly on point, because the employee used proceeds from the employment contract to payoff student debt, the applicability of 11 USC 523 for discharge of an "educational benefit" still apply.

A “qualified education loan” is defined under the Internal Revenue Code as any education loan to pay expenses while a student is enrolled in at least half the normal full-time student load; it does not include loans between family members or loans made under an employment contract. 26 U.S.C. § 221(d)(1).

Note, that I do agree with Des and particularly because I don't know how you treated this in the bankruptcy, whether a claim was filed, what type of claim, the amount of the claim, or anything you did to obje4ct to a full claim of $104K.

[fldoc]

Thanks.
I am in a 100% plan. I did list the State of GA as a creditor and I included the punitive amount in my listing. They did make a claim. They claimed the punitive amount. Not sure if my plan is "confirmed" or what that means. Your thoughts.....

[justbroke]

Did you file with an attorney? I would wonder why, with such a LARGE difference between the actual loan amount and the claim (of nearly $60K), that you wouldn't file a complaint to determine dischargeability. I think there's a genuine question whether the penalty is an "educational" benefit subject to non-dischargeability clause found in 11 USC 523. I, however, cannot answer that question and it looks like they file a full "educational" claim of the $104K.

This is worth working with your attorney and determining the expense of trying to make it non-dischargeable. If you're in a 100% plan, sounds like you'd be paying their entire claim (of $104K). Imagine if you spent $6K on the complaint to have $60K of this as non-dischargeable? It could be worth it.

[fldoc]

Yeh, I filed with attorney...I have them looking into it now...I was hoping the damages portion of the claim ($96k) would be discharged in bk and I would pay back what I borrowed ($48k)....$40k of which I already repaid

[justbroke]

That sounds like a good plan. I'm a layperson (not an attorney), and what Des (an attorney) wrote above is great information. Perhaps a dischargeability complaint, also known as an adversary proceeding, would be worth it for you in this particular case. Spending $6K to save $96K may be a good investment. However, if you're in a 100% plan anyhow I don't see how you would not still end up paying it back even though you had it declared as both non-educational and therefore subject to the discharge.

Did they call them "damages" on their claim? That would be interesting.

[fldoc]

yeh....they call it "triple damages"....man I would love to get out of these ****er's grasp!

[despritfreya]

In re Lipps, 79 B.R. 67 (Bankr.M.D.Fla., 1987)

"Based on the foregoing, this Court is satisfied that the amounts representing interest owed by the Debtor to the Scholarship Fund are nondischargeable debts pursuant to 11 U.S.C. § 523(a)(8). Therefore, the Scholarship Fund's Motion for Summary Judgment should be granted as to these amounts. This Court is further satisfied that the amounts owed by the Debtor to the Scholarship Fund in liquidated damages are dischargeable debts. The Debtor's Motion for Summary Judgment, therefore, should be granted as to these amounts."

See also:

Burks v. State of Louisiana & Board of Regents, 244 F.3d 1245 (11th Cir., 2001)

The above are two cases I quickly found and therefore are not necessarily determinative of this issue. However, unless there is other case law that supports a different conclusion, IMO the liquidated (treble) damage clause is an allowed claim, unless a court determines it to be an impermissible penalty or something that needed to be adjudicated to take effect.

While the liquidated damage clause appears not to be an educational benefit and therefore is dischargeable (not subject to 523(a)(8)), such does not help if, due to your “ability to pay” you are paying 100% of all allowed claims.

Please keep us posted.

Des.

[justbroke]

Des, thanks for doing some research on this. I'm sure the poster will appreciate you taking the time and presenting, of all things, cases within the 11th Circuit that could help their argument. I agree that if this is 100% plan because there is significant DMI, then it may all be moot since the poster would still end up paying the entire debt.