The Supreme Court announced this week that it will hear a student loan bankruptcy dischargeabilty case, Espinosa v. USA Funds. The Associated Press states that the Supreme Court will be deciding whether student loans can be dismissed through bankruptcy with just a notice to the collector instead of a hearing proving that paying the money back would cause an “undue hardship”.
Not exactly. The Espinosa case deals with a narrow aspect of student loan bankruptcy law that does not cover all student loan debtors seeking bankruptcy discharges. Rather, the case deals with a small subset of borrowers– those who file Chapter 13 cases in bankruptcy AND complete those plans (by most accounts, somewhere between 30 and 50% of debtors who file Chapter 13 plans complete their plans) AND get those plans confirmed without the creditor objecting to the discharge and requiring the debtor to prove hardship.
Even if the Supreme Court agrees with the borrower, this will not be the end of the unfair treatment of student debtors in bankruptcy. Instead, it will be a wake-up call to creditors to stay alert and object in a timely way to pending Chapter 13 confirmation plans. As long as a creditor does this in a particular case, the borrower in that case, like all other student loan borrowers, will have to prove undue hardship through an adversary proceeding in order to discharge student loan debt. Most likely the creditors will catch on (most already have) since as the Ninth Circuit noted in the Espinosa decision in describing the creditors, “we aren’t talking here about destitute widows and orphans, or people who don’t speak English or can’t afford a lawyer.” Instead, creditors are “huge enterprises” who usually act aggressively to advance their interests.
