Unexpected Bankruptcy Ruling in Student Loan Case

In March 2010, an unexpected ruling by the Supreme Court made it easier for people who claim they can’t pay their student loans to obtain bankruptcy protection.

In 1988 and 1989 Franciso J. Espinosa took out four student loans at a total of $13,250 to attend a trade school in Arizona. Four years later, in 1993, he filed for protection under the bankruptcy laws of Chapter 13. During his bankruptcy hearing he proposed to repay the lender of the student loans over a period of five years without interest.

The case is unusual in that Chapter 13 of the Bankruptcy Code only allows student loans to be discharged if a bankruptcy judge rules that repayment of the loan would pose an “undue hardship” on the debtor. Apparently, as the judge found no reason to make this ruling based on Mr. Espinosa’s financial circumstances, both he and Mr. Espinosa neglected to follow the procedures defined by bankruptcy law.

Mr. Espinosa also omitted to notify the lender of the student loans in the required way. By law, a service of a summons and complaint, similar to those in a civil lawsuit, must be served to a lender. The court did send the lender notices about Mr. Espinosa’s proposal and the court’s approval thereof.

There was no objection from the lender, despite the fact that the loan was the only debt listed in Mr. Espinosa’s proposal. Mr. Espinosa finished his payment plan in 1997, and his debts were discharged. But years later the lender suddenly tried to reopen the case.

Despite strong objection from federal and state governments as well as the student loan industry, the Supreme Court decided in favor of Mr. Espinosa, ruling that the lender had waited too long to object to them.

 

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