The Supreme Court to Decide Whether Student Loan Debts May Be Discharged Without a Showing of "Undue Hardship-

Submitted by Jen Jones on Tue, 06/16/2009 - 1:44pm

The Supreme Court to Decide Whether Student Loan Debts May Be Discharged Without a Showing of

When Francisco Espinosa filed his Chapter 13 bankruptcy petition, he must have had no idea his case would end up before the United States Supreme Court. Espinosa's case was just another run-of-the-mill consumer filing, except for one thing . . . the repayment plan he proposed provided that he would pay back $13,250 to United Student Aid Funds, Inc. (USA Funds), the holder of his student loan debts. But he actually owed USA Funds $17,832. The bankruptcy court confirmed the plan. The trustee then sent USA Funds a notice stating that its claim "would be paid as listed in the plan- if it did not dispute the amount within 30 days. USA Funds never filed an objection.

Espinosa went on to successfully complete the Chapter 13 plan. The remaining debts were discharged, including the outstanding balance on the student loan debt. All must have seemed well again. But then, three years after Espinosa's case was complete, someone started intercepting his income tax refunds. Who? USA Funds. Why? To satisfy the remaining balance on the student loan debt. Not surprisingly, Espinosa petitioned the bankruptcy court to hold USA Funds in contempt for violating the discharge order.

But USA Funds was undeterred. It filed a cross-petition, claiming the repayment plan Espinosa had completed was invalid. Its theory ran as follows: Student loans can't be discharged unless the debtor files and serves a complaint on the creditor and then shows at an adversary proceeding that he or she would suffer "undue hardship- if required to pay back the debt. Espinosa didn't do this. He simply listed in his proposed plan the amount he intended to pay USA Funds and, after the plan was confirmed, and made the required payments until the court entered a discharge order.

The bankruptcy court sided with Espinosa, ordering USA Funds to cease further collection activity. The court ruled that the creditor had forfeited any challenge to the plan by failing to file a timely objection to it. But USA Funds appealed the ruling to the district court, which reversed, finding Espinosa's failure to serve a formal complaint on USA Funds, stating his intention to pay back only a portion of the debt, violated its right to due process. Espinosa sought relief in the Ninth Circuit Court of Appeals.

The Ninth Circuit issued its decision late last year, and ruled in favor of Espinosa. In no uncertain terms, the court found USA Funds had received more than adequate notice of Espinosa's intention under the plan and forfeited any challenge to it:

"A creditor receiving such notice would have known that its debt could be adversely affected by the proposed plan, and that it needed to file an objection if it wished to avoid that result. Funds raised no such objection, nor did it appeal the order confirming the plan. We cannot say that Funds was taken by surprise or was denied due process. Quite the contrary: Funds appears to have been a willing participant, perfectly happy to receive the benefits of the Chapter 13 plan, but unwilling to suffer the consequences of its failure to file an objection.-

USA Funds petitioned the United States Supreme Court for review. Yesterday, the court granted the petition. The specific question it will consider is whether a bankruptcy court may discharge student loan debt where the creditor simply fails to object to a plan that proposes repayment of less than the total amount owed, or whether the debtor must first show "undue hardship- at an adversary proceeding.

The issue here is largely a procedural question, concerning whether a creditor's failure to object forfeits a right it would otherwise have. But, to resolve the case, the justices will likely have to confront meatier issues, like the meaning, significance, and purpose of the debtor's traditional obligation to show "undue hardship.- So, the overtones of a decision in favor of Espinosa could begin to chip away at the thick walls that have traditionally insulated student loan debt from discharge in bankruptcy.

From: The Law Offices of John T. Orcutt, with convenient office locations in Raleigh, Durham, Fayetteville, and Wilson. Call (toll free) +1-833-627-0115, to set up a free, confidential debt consultation. Visit www.billsbills.com for more information.

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