Supreme Court Hears Bankruptcy Student Loan Case
On December 1st, the U.S. Supreme Court heard a case involving student loans and court deadlines in bankruptcy filings. The ruling on the case could be significant for filers of both Chapter 7 and Chapter 13 bankruptcy.
Background: Student Loans in Bankruptcy
Student loans are one of the few types of financial obligations (along with child support payments, alimony and taxes) that are difficult discharge in bankruptcy court. Generally speaking, student loans:
- In Chapter 13 bankruptcy: become part of the filer’s three- to five-year repayment plan and are largely (if not completely) paid off by a case’s end; or
- In Chapter 7 bankruptcy: cannot be discharged and so remain the filer’s responsibility after other unsecured debts (such as credit card debt) have been forgiven.
The rules are strict to ensure that the majority of student loans are repaid, which in turn allows lenders to offer money at lower interest rates.
The Case Before the Court
The case now before the court is that of a man named Francisco Espinosa. Here are the key facts:
- In 1988, he was working for America West airline and decided to go to technical school to learn computer skills.
- Like about one-third of Americans, Espinosa took out student loans to fund his education; however, when he graduated, he was unable to find a job in his field.
- America West began to have financial troubles and cut worker wages. Espinosa, in 1992, earned slightly more than $6 per hour.
- Espinosa lived simply: he reportedly drove an inexpensive car and had no debt except for $13,000 in educational loans, which he was unable to pay.
- To clear his debt, Espinosa filed for Chapter 13 bankruptcy and adhered to a repayment plan. He received his bankruptcy discharge in 1997 after having paid all of his student loans except for the $4,000 in interest that had accrued.
- In 1999, the lender responsible for his student loans (United Student Aid Funds Inc.) began demanding payment of the interest from Espinosa.
A note on Chapter 13 cases: before a repayment plan is confirmed by the court, it must be agreed to by all involved parties – in this case, that means United was informed of the repayment plan (multiple times) before the court approved Espinosa’s case.
United missed deadlines to appeal the ruling and several appeals courts have already ruled in Espinosa’s favor. The Supreme Court’s decision in this case could have significant implications about the power of lenders to collect debts after a personal bankruptcy filer has received a full discharge of debts from the court.
Additional Resources
Student Loans, Financial Distress and the Need for Policy Reform PDF
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