Supreme Court to determine if student loan debt is dischargable in Bankruptcy

Today, it has been announced that the Supreme Court of the United States is to decide a case that could have huge benefits and repercussions for people with student loans. Currently, you need to prove “undue hardship,” which may not sound like a huge barrier, but in practice it is. It can be almost impossible to successfully discharge student loans in a Chapter 7 bankruptcy, while in a Chapter 13 bankruptcy you may get up to 5 years respite from full payments and interest.

The facts of this U.S. Supreme Court case (United Student Aid Funds v. Espinosa, 08-1134.), are as follows: Francisco Espinosa gave United Student Aid Funds Inc. a Chapter 13 bankruptcy plan saying he would pay back $13,250 on his four student loans. The loan company did not object to this plan in 1994, however it did say he owed around $4,000 in addition to the Chapter 13. In 2000, Espinosa’s income tax refund was taken to pay on the rest of the debt.

The loan companyclaims the Chapter 13 bankruptcy is void because there was no proof that Espinosa was under “undue hardship”. The 9th circuit (California and surrounding area) said the company should have objected at the time.

The current U.S. Supreme Court is quite conservative, so we do not hold much hope that the 9th Circuit Court decision will be upheld (approved) by the higher court. It is due to be decided later this year and we will follow with interest.