Supreme Court tackles student loan discharge

Published Friday, December 11, 2009

Student loans are extremely difficult to discharge in bankruptcy. To avoid future obligation, a debtor must show that having to make those payments in the future would constitute an undue hardship. Typically this is done by filing a separate adversary action in bankruptcy court. The Supreme Court said it will decide whether student loans can be dismissed through bankruptcy with just a notice to the collector instead of the adversary claim.

Francisco Espinosa filed Chapter 13 and included in his plan a payment to his student loan company United Student Aid Funds Inc. which would cover his current balance but not the additional interest. USA Funds, which said Espinoza owed $17,832, did not object to his bankruptcy plan, which was completed in 1994. However, six years later, Espinosa's income tax refund was taken to pay off the rest of the debt. USA Funds said the bankruptcy agreement is void because Espinosa never proved in court that paying the full amount would cause him undue hardship.

Espinosa says the bankruptcy agreement is final and the company cannot go back on it now. The 9th U.S. Circuit Court of Appeals in San Francisco agreed, saying the time to object was before the bankruptcy was completed. Bankruptcy practitioners and lenders will be paying close attention to the ruling, not expected to be issued until Fall 2010.

The case is United Student Aid Funds v. Espinosa (08-1134).