Supreme Court Hears Student Loan Bankruptcy Case

December 4, 2009 at 3:12 pm Leave a comment

On December 1, the Supreme Court considered whether a discharge of student loan debt by a bankruptcy court  is valid without an adversarial hearing to prove “undue hardship” as required by bankruptcy court rules.  The defendant in United Student Aid Funds, Inc. v. Espinosa borrowed $13,000 to go to technical school in 1988 and 1989.  In 1992 he filed for bankruptcy, identifying the student loans as his only debt.  United Student Aid Funds, Inc. (USAF) filed a proof of claim with the court for $17,832.15, representing the principal and interest on the loans.  The bankruptcy court entered a confirmation order requiring Espinosa to pay back the principal only, not the approximately $4,000 of interest and sent USAF a form notice of their judgment.  The court did not make an undue hardship finding as required by the Bankruptcy Code, nor did Espinosa initiate an adversary proceeding as required by bankruptcy court rules.

 Three years later, USAF sought to collect the additional money owed by Espinosa by garnishing his federal income tax refunds.  Espinosa reopened his bankruptcy case, which eventually reached the Supreme Court last Tuesday.  The justices appeared skeptical of USAF’s arguments that the bankruptcy court judgment was void and that a lender cannot waive the undue hardship determination, even if the lender’s lawyer was in the courtroom.  However, the justices also questioned Espinosa’s argument for switching the burden that Congress put on the debtor to the creditor. 

Student loan debt, like child support and tax debt, is generally not dischargeable in bankruptcy.  If the Supreme Court sides with for Espinosa, the new rule could be extremely burdensome and costly for student loan lenders.  A decision on the case is expected next year.

Entry filed under: Uncategorized.

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