The U.S. Supreme Court has granted certiorari to United Student Funds, Inc. v. Espinosa, agreeing to consider whether student loans may be discharged in bankruptcy under the limited circumstances wherein the creditor fails to object to a discharge plan which includes student debt.
Before anyone gets too excited about this, no matter which way the Court rules, it is unlikely to result in the restoration of consumer protections to those carrying student loan debt.
The question before the Court is rather fact-specific, i.e., whether the Bankruptcy Court erred in granting a final disposition to Espinosa's Chapter 13 restructuring plan that included the student loans at issue. The Court is not being asked to consider the constitutionality of the statutes that preclude student loan debt from being included in Bankruptcy proceedings in the first place.
First off, it is important to understand that there are different types of bankruptcy. This case does not involve Chapter 7, the type of bankruptcy where a debtor essentially gives up and nearly all assets are liquidated to pay off the creditors to whatever extent possible. Nor is this a Chapter 11 case, which usually involves a corporation's restructuring of debt. Rather, the case that the Supreme Court has agreed to hear involves a Chapter 13 proceeding which is generally the section of the Bankruptcy code that applies to individuals seeking a restructuring of debt so that they may eventually get their head above water.
Generally speaking, student loans are exempt from discharge or restructuring under the Bankruptcy code unless the debtor can demonstrate "undue hardship" - a fairly high standard to meet which essentially requires that the debtor have no chance of ever obtaining an income again to pay off his debts. If there's any chance at all of the debtor being in a position to pay his student loan debts again, he'll have a hard time meeting the "undue hardship" standard.
That said, where a debtor does seek to discharge his student loans because of undue hardship, the rules require the filing of a summons and complaint, giving any creditors the advantage of an adversarial structure in which to litigate the claims. Absent any such attempt by the debtor, no such adversarial structure is instituted and, instead, a restructuring plan is crafted and notice is given to all creditors so that they may either accept the terms of the plan, or make an objection to it in a timely fashion.
In Espinosa, United Student Aid Funds, Inc. was given notice of the restructuring plan that included Espinosa's student loans in the amount of $13,250; an amount that differed from United Student Aid Fund's claim in the amount of $17,832.15. Not only did United Student Aid fail to object to the restructuring plan when it was initially given notice of it, it failed to object when the Court specifically informed United that the amount they claimed Espinosa owed was less than the amount United Claimed. Thus, since there was no objection, the restructuring plan was approved.
Three years later, United Student Aid began intercepting Espinosa's income tax refunds to satisfy the unpaid portion of the student loan. Espinosa, in turn, petitioned the Bankruptcy court for a contempt order, claiming that United had violated the terms of the agreed upon restructuring plan.
The 9th Circuit Court of Appeals ruled in favor of Espinosa, reasoning that United had ample time in which to object and that, after 3 years, any objection it might have had to the student loans being included in the restructuring plan in the first place was untimely.
Other Circuit Courts of Appeals have ruled differently, holding that the creditors' statutory and Constitutional Due Process rights were violated by including student loan debt in a restructuring plan without a demonstration of undue hardship. The 9th Circuit rejected the attenuated reasoning behind those decisions and, instead, adhered to its own precedents which renders the statutory and Constitutional claims moot.
If I had to predict which way the Supreme Court will eventually rule, it seems to me that the 9th Circuit's reasoning is more sound and, as such, its finding for Espinosa will be affirmed.
In the simplest terms, United had not one, but two opportunities in which to object to Espinosa's student loan debt's inclusion in the restructuring plan. It could have objected to it when it first received notice of the restructuring plan and claimed it was entitled to service of a summons and complaint and, subsequently, an undue hardship hearing, or; it could have objected when it was specifically given notice that the amount owed to United as claimed in the restructuring plan differed from United's claimed amount.
There are any number of reasons why United may have made a strategic decision not to object at either point in the process. Perhaps United made a decision that it was more likely to recover some money under this restructuring plan and it didn't want to gamble that Espinosa would be able to demonstrate undue hardship. Who knows? The point is, they had their chance to object and they failed to do so. As far as I can tell, game over. The Court need not reach the statutory or Constitutional questions of whether the student loan debt should, or even could have been included in the restructuring plan in the first place because United's rights in those regards were essentially waived by their failure to raise a timely objection.
So, what does this mean for the average student loan debtor? Very little, I'm afraid. The fact is, student loan debt is statutorily prohibited from inclusion in a bankruptcy discharge or restructuring without a showing of undue hardship. This case merely represents a narrow set of circumstances where a mistake was made but the aggrieved party failed to object to that mistake when it should have. Had United made their objections when they had the chance, it's likely they would have prevailed.
The bottom line here is that anyone expecting the Supreme Court's eventual decision in this matter to have any far-reaching implications for the majority of student loan debtors is merely engaged in wishful thinking.
How if this is passed is this going to protect those that claim chapter 13 before the law was made (thats if the supreme court passes it)?
Good analysis Robert. Let's hope that the SCOTUS agrees with the 9th Circuit and allows people who are underwater to propose restructuring plans of their student loans in a chapter 13.
Perhaps, just maybe, the court could use this as an occasion to loosen its standards on what constitutes an undue hardship and force creditors to object to requests for debt restructuring in a 13.
I'm a little nervous though. Kennedy, the current swing vote, currently enjoys paid vacations in Europe (I mean, summer teaching seminars) courtesy of TTT McGeorge Law School-he's actually a faculty member as I recall. Isn't this actually a conflict of interest, now that I think about it? Shouldn't he recuse himself?
Yep-looks like he's still on the student loan gravy train. Seriously, how can he decide this case?
The Espinosa Case scenario you describe brings to the forefront the importance of writing our Senators/Representatives and asking for legislative change. The laws must be changed, and then we can be assured of what our rights are. It is very sad to see that the changes our Congress has made in the past have been consistently favoring the lenders, many of which have demonstrated greed beyond the likes of anything I have ever seen in my lifetime, and we are all, currently, as a Nation experiencing the aftermath of the misjudgement of Congress and of the greed of many financial institutions. Whether one has a student loan, or any other loan, it is indisputable that their greed has affected us all, and whether one defaults on a mortgage, a credit card, a student loan, the greed underlining is part of the cause of the defaults. We need to change the laws. If we are entitled to life, liberty and the pursuit of happiness, I dare say that many of the laws that are being legislated are not accomplishing this goal. I leave you with this question. If we as a Nation and a People want laws that grant us life, liberty and the pursuit of happiness--why aren't we changing the laws???? Maybe we aren't as free as we would like to think we are??? Robert Applebaum is correct, we have to change the laws, the courts only enforce and interpret the legislation that is put on the books by whoever we elect do do so. Write your representatives, call them, every week. Good Luck and never give up.