If any of our readers are buried up to their eyeballs in
student loan debt, the headline of this story, while technically correct, may
be setting you up for disappointment. So I’ll get this out of the way: absent
congressional action, it’s still going to be very difficult for most debtors to
discharge their student loan debt in bankruptcy.
Basically, the Supreme Court has said (Opinion, .pdf) that creditors can’t sit on their rights (which are quite expensive under bankruptcy law) and then seek to collect on a debt which a bankruptcy court has already discharged. The story is also reported here and here.
Under the current system of bankruptcy laws, student loans
can’t be discharged unless the debtor can show that being required to pay them
would impose “undue hardship.” Undue hardship, in this context, is extremely
difficult to prove. Inability to find employment doesn’t count. A severe but
theoretically temporary illness, injury, or disability doesn’t count, either.
Basically, the debtor has to show that they are entirely unable to repay their
loans, and, essentially, that forcing them to do so would kill them. They also
usually need to show that there is no significant chance that they will become
able to pay their loans in the future. As you might imagine, this is a pretty
difficult standard to meet.
Furthermore, before a court can determine that imposing loans would cause undue hardship, it must hold an adversarial proceeding in which the creditor is allowed to argue why the debt should not be discharged.
This case involved a former trade school student named Francisco Espinosa who graduated in the late 80s with about $13,000 in debt (That’s what passed for a crushing student loan burden back then? How quaint.). He filed for bankruptcy in 1993, and the bankruptcy court crafted a repayment plan which ended in most of his student loan debts being discharged. While his creditor did not receive a formal summons and complaint, there’s evidence that it received actual notice of the proceedings, nonetheless. It failed to object. 7 years later, the creditor sought to collect the unpaid interest on the student loan.
The Supreme Court essentially said that this was a technical error, but it was not severe enough to warrant reversal of the bankruptcy court’s decision, especially since the creditor knew about the ruling, and didn’t do anything about it for 7 years. Writing for the unanimous court, Justice Thomas said that the bankruptcy rules do “not provide a license for litigants to sleep on their rights.” The creditor had actual notice, and failed to object.
Simple fairness dictates that once the case is seen through to completion, and everybody has (or should have) moved on, a simple error should not require everyone to interrupt their lives, and go back to court, especially when the party seeking that remedy knew about the error years ago, and had every opportunity to point out that error.
Our legal system puts a high premium on finality. And this is generally a good thing. When a final judgment has been issued, and every concerned party has had a chance appeal the judgment, or otherwise change it, everyone should simply move on, whether or not the judgment was correct. Of course, there should be a few exceptions in the most extreme circumstances, such as death penalty cases, especially if new evidence comes to light long after the trial.
If nothing else, this case does at least clarify the rights and obligations of debtors and creditors in bankruptcy cases, which should make these proceedings slightly simpler in the future.
Simplifying the rules of bankruptcy is always a good thing. According to LegalMatch case data, a large number of consumers who are seeking bankruptcy attorneys are attempting to discharge student loans. Sadly, because of the way bankruptcy law is structured, it will be nearly impossible for most of them to do so, and they don’t realize it (after all, most people don’t see any reason why student loans should be treated any different from other types of unsecured debt, for bankruptcy purposes).
If the requirements for discharging student loan debt are made clearer, perhaps people who don’t have much of a chance of being successful in bankruptcy will realize this, and not waste their time and money on a futile bankruptcy filing, and spend it on methods for dealing with their debt that might be more fruitful.
By: Rusty Shackleford
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