Bankruptcy Filing Case Goes to Supreme Court Over Student Loans

Student loans provide many Americans the opportunity to achieve their dreams. But these debts add up leaving many wondering how to pay their debt after college.

Francisco Espinosa was one of the many who fell into this category. In 1988, he took out four student loans for a grand total of $13,250. A small amount compared to today’s student loans. he used the loan attend a trade school in Arizona.

Four years later he filed for bankruptcy protection. Espinosa requested to pay the principle amount of his loan over a five year period without interest.

The bankruptcy judge in charge of his case approved his request and Espinosa was allowed to make payments to his lender without interest.

But, as The New York Times highlights in its report, that the judge did not follow bankruptcy law, and a dispute about the bankruptcy court ruling made its way to the Supreme Court.

Under Chapter 13, student loans are discharged when a bankruptcy judge finds that repaying the loans impose an “undue hardship.” The judge did not rule this in his case.

Espinosa was required by law to inform his lender, United Student Aid Funds, that he was filing for bankruptcy, but he never did.

Even though Espinosa did not inform his lender, the courts did. They sent letters to the company notifying them that his bankruptcy case was approved. They never objected or appealed the bankruptcy proposal.

So when Espinosa finished paying his principle in 1997; the courts removed the interest on his loan.

Years later United Student Aid Funds objected to the bankruptcy case and attempted an appeal. They wrote a letter to the courts requesting that Espinoza be liable for the interest on the loans.

They further said that if the judge ruled in favor of Espinosa his decision could “open the floodgates” for people eliminating student loan interest debt with bankruptcy, possibly even through Chapter 7.

Despite the lender’s efforts, Supreme Court Judge Clarence Thomas and the rest of the court ruled in favor of Espinosa.

He acknowledged that the judge who initially handled the case dropped the ball when following the bankruptcy legal process. He did not prove that Espinoza would suffer “undue hardships” if he paid interest on his loans.

But Thomas said that the issue was how long the lender waited before they filed their appeal.

He said that “the bankruptcy courts failure to find undue hardships before confirming Espinosa’s plan was a legal error.” He continued to say that, “the order remains enforceable and binding because United had notice of error and failed to object or timely appeal.”

Judge Thomas also said that the right to reopen the case under extraordinary circumstances did not apply because United took too long to appeal. Some lenders are concerned that this could pave the way for future debt dispute.