Blog Post

    The Supreme Court granted a petition for a writ of certiorari in a case involving the discharge of student loans, which are currently not dischargeable by statute absent undue hardship.  The case is United Student Aid Funds, Inc. v. Espinosa, in which the debtor filed for Chapter 13 bankruptcy and included the principal balance of his student loans in the repayment plan, which declared that any remaining balance after the repayment period would be discharged.  He did not allege undue hardship or institute an adversary proceeding to give the lender the opportunity to challenge the discharge.  Instead, Espinosa mailed notice of the case and plan to USA Funds at the address where loan payments are received.

    USA Funds then filed a proof of claim for the entire balance, and Espinosa did not object.  USA Funds did not object to the repayment plan, and it was confirmed without any finding of undue hardship.  After confirmation of the plan, the trustee notified USA Funds that the amount listed in its claim (the entire balance) differed from the amount in the plan (interest only) and would be paid according to the plan.  Espinosa made the required payments, and the balance was discharged.  However, the order excluded from the discharge any student loan debt, pursuant to the statute.

    Espinosa’s debts were then transferred to the Department of Education, which caused the Treasury Department to intercept his tax refunds.  Espinosa filed a motion alleging a violation of the discharge injunction, and USA Funds alleged that the discharge was void.  The bankruptcy court ruled in Espinosa’s favor but the decision was later overturned by the district court.  Espinosa appealed to the circuit court of appeals, which heard the case and remanded to the bankruptcy court to determine whether the exception of the student loans from the discharge order was clerical error.  The bankruptcy court ruled that it was, and the circuit court reversed, holding that a debtor may obtain the discharge of a student loan by merely including it in a Chapter 13 plan, without proving undue hardship in an adversary proceeding, if the creditor fails to object to the plan.  Therefore, the orders confirming Espinosa’s plan and discharging his debt were held to be valid and final.  USA Funds petitioned for rehearing en banc, which the court denied with an order amending its opinion.

    Bankruptcy proceedings are life-changing events that are too important and complex to attempt without proper guidance.  If you are considering filing for bankruptcy, protect your interests and contact us today.