Tax deductions prevent discharge of school debt

A bankruptcy court held that by deducting interest on her tax returns, a debtor had admitted that her loan was incurred solely to pay higher education expenses, making it nondischargeable under bankruptcy law.

Facts: Christine Melissa Mallett took out federal and private loans to attend several universities between 2000 and 2007. She later entered into a written loan agreement with Frances Mallett, the grandmother of her then-husband, for nearly $71,000 to pay off her private student loans. The agreement required her to repay the amount at 4% interest over 25 years. Mallett stopped paying on the loan after eight years.

Frances Mallett died, and her son, Victor Mallett, took assignment of the loan. He sued Christine Mallett in state court for breach of the loan agreement, obtaining a final judgment for more than $61,000. Three months later, Christine Mallett filed for bankruptcy. Victor Mallett sued to have the debt declared nondischargeable.

Issues: Bankruptcy Code (Title 11) Section 523(a)(8)(B) includes in nondischargeable debts a qualified education loan, as defined in IRC Sec. 221(d)(1), incurred by an individual, unless excepting it from discharge would impose an undue hardship on the debtor and the debtor’s dependents. Sec. 221, which provides for deductibility of interest paid on qualified education loans, defines them as incurred by the taxpayer solely to pay certain qualified higher education expenses.

Christine Mallett argued that the loan from Frances Mallett was not shown to have been used solely to pay higher education expenses and therefore did not meet the definition.

Victor Mallett did not introduce into evidence copies of Christine Mallett’s original loan documents showing their purpose, but he did introduce copies of her income tax returns for 2009 through 2016, on each of which Christine Mallett had deducted interest paid to Frances Mallett on the loan.

Holding: The bankruptcy court, relying on Conti v. Arrowood Indemnity Co., 982 F.3d 445 (6th Cir. 2020), held that Sec. 221(d)(1)’s plain language requires only that a qualified education loan be incurred to pay higher education expenses, regardless of its use. Furthermore, the statutory definition includes “indebtedness used to refinance indebtedness which qualifies as a qualified education loan,” as was the case here. Thus, by deducting the interest on the loan, Christine Mallett had made an unrebutted “evidentiary admission” that it was a qualified education loan under Sec. 221 and the Bankruptcy Code and was therefore nondischargeable, the court held.

• In re Mallett, No. 8:19-bk-01436-MGW (Bankr. M.D. Fla. 3/23/21)

— By Paul Bonner, a JofA senior editor.