Yesterday I mentioned two bankruptcy-related cases the Supreme Court heard this week. One of them, the case of U. S. Student Aid Funds v. Espinosa, addresses the issues involved in the student-loan industry. A lender challenged a bankruptcy plan approved by lower courts that allowed an Arizona man to discharge a portion of his student loan debt without having to show “undue hardship,” as federal law requires.
The case involves Francisco J. Espinosa, an airline ramp agent in Phoenix, who in the late 1980s received $13,250 in student loans. In 1992, he filed for Chapter 13 bankruptcy protection, and he proposed paying $274 per month over five years to United Student Aid Funds Inc. This monthly payment would cover the principal owed, but not the $4,000 in interest on the loans.
Espinosa had not initiated a court proceeding to prove undue hardship, as is required by federal bankruptcy statutes. Instead, the bankruptcy court in Phoenix sent a notice to United Student Aid Funds informing them of the proposed discharge plan, and giving them the chance to respond. They did not object to the bankruptcy court’s confirmation of the plan. Later, the U.S. Department of Education began efforts to collect from Espinosa the outstanding interest from his student loans.
Espinosa went back to the bankruptcy court seeking to get the creditors to cease their collection efforts. Espinosa eventually won a ruling from the U.S. Court of Appeals for the 9th Circuit, stating that his bankruptcy plan was valid and that the lender could not collect any more from him.
In an oral argument presented to the Supreme Court this week, lawyers for United Student Aid Funds and the Obama administration warned that upholding Espinosa’s lower-court victory would encourage debtors to try an end run around the statutory requirements for student loan relief.
Toby J. Heytens, an assistant to the U.S. solicitor general who argued on the side of United Student Aid Funds, also noted there is “an important public interest at stake here, which is that the [federal] Department of Education is reinsuring all of these loans. There is a powerful interest in ensuring the integrity of the student loan system as a whole, that, regardless of the decisions that an individual debtor and perhaps an individual creditor are willing to make in particular cases, Congress has an overriding policy that student loans should not be discharged unless there is a determination that this is the extraordinary case, rather than the ordinary.”
The lawyer representing Espinosa, Michael J. Meehan, admitted the bankruptcy court did not follow the letter of federal law in approving his client’s discharge plan. But, given the strains on the bankruptcy system, “I think that . . . if a creditor and a debtor wanted to come in and stipulate that there would be a discharge of a portion of the student loan without a finding of undue hardship, that certainly they can do so.”
The United Student Aid Funds Inc. v. Espinosa case should be decided by July 2010.
If you live in Denver, Aurora, Arvada, Brighton, Broomfield, Commerce City, Englewood, Highlands Ranch, Lakewood, Lafayette, Littleton, Northglenn, Westminster, Wheat Ridge, or Golden, Colorado, please feel free to contact me. Kevin D. Heupel, Colorado Bankruptcy attorney, 303-955-7570, COBankruptcyHelpEmail, free-consultation form.
