Yesterday, the U.S. Supreme Court heard argument in a bankruptcy case in which the confirmed Chapter 13 plan effectually discharged some of the debtor’s student loan debt when there had been no finding of “undue hardship” as required by bankruptcy law.
The heart of the matter in this case is this – when you have a confirmed Chapter 13 plan with language that violates a bankruptcy statute, which controls? The confirmed plan or the statute?
Student loans are one of several debts that cannot easily be discharged in bankruptcy. In order to discharge student loan debt, a debtor must prove that repaying the student loan would work an “undue hardship” upon the debtor and his family.
The case at issue, United Student Aid Funds Inc. v. Espinosa, involves a debtor who received some $13,250 in student loans to attend trade school. Mr. Espinosa filed for Chapter 13 bankruptcy and his Chapter 13 plan proposed paying $274 per month over five years to United Student Aid Funds Inc., an amount that would cover the principal but not some $4,000 in interest on the student loans. The lender did not object to the bankruptcy court’s confirmation of the plan.
And Espinosa never filed an adversary proceeding to prove undue hardship as federal bankruptcy statutes require for discharging student loan debt.
After Espinosa completed the payments required by his Chapter 13 plan and received his discharge order, United Student Aid Funds (USAF) began intercepting Espinosa’s income tax refunds to satisfy the unpaid interest from his student loans. So Espinosa reopened his bankruptcy case and petitioned the bankruptcy court for an order holding USAF in contempt for violating the discharge injunction. USAF cross-moved for relief from the bankruptcy court’s order confirming the plan, on the ground that the order had been entered in violation of USAF’s rights under the Bankruptcy Code and Rules.
The bankruptcy court rejected USAF’s argument. It held that USAF had violated the discharge injunction and ordered USAF to cease all collection activity against Espinosa. It also denied USAF’s motion for relief from the confirmed plan, holding that the plan became final when it was confirmed and that USAF should have objected to any procedural defect before confirmation.
USAF appealed to the district court, which reversed the bankruptcy court.
Then Espinosa appealed to the 9th Circuit Court of Appeals which reversed the district court. The 9th Circuit held that student loan debts can be discharged by way of a Chapter 13 plan if the creditor does not object after receiving notice of the proposed plan.
Therefore, at least in the 9th Circuit, the terms of a confirmed Chapter 13 plan control even though they conflict with the plain language of a bankruptcy statute.
In yesterday’s oral argument before the U.S. Supreme Court, lawyers for United Student Aid Funds and the Obama administration warned that upholding the 9th Circuit’s ruling would encourage many more debtors to try an end run around the statutory requirements for discharging student loans in bankruptcy.
A decision should be announced before the Supreme Court ends it’s term next July.
{ 4 trackbacks }
{ 0 comments… add one now }