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Supreme Court Decision Affirming Discharge of Student Loan Debt Prompts Possible Revisions to Chapter 13 Procedures

By carmichaellibrary (Student Book Art  Uploaded by AlbertHerring) [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia CommonsA decision by the U.S. Supreme Court in United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367 (2010), has reportedly prompted a review of various Chapter 13 bankruptcy procedures. The court affirmed an order discharging student loan debt, but only because the creditor failed to object or appeal properly. The Judicial Conference Advisory Committees on Bankruptcy and Civil Rules published a set of proposed amendments to the Federal Rules of Bankruptcy Procedure this summer that could modify how parties to a bankruptcy give notice of an adversary proceeding, how debtors give notice of a Chapter 13 plan, and how creditors make objections.

Federal law prohibits bankruptcy courts from discharging student loan debt unless it finds that the debtor would experience “undue hardship.” 11 U.S.C. §§ 523(a)(8), 1328(a)(2). In United Student Aid, the debtor filed a Chapter 13 plan that included repayment of the principal of his student loan debt, followed by discharge of the accrued interest at the close of the case. The creditor filed a proof of claim that included the total amount of the debt, but did not object to the plan. After the bankruptcy court confirmed the plan without entering a finding of “undue hardship,” the creditor still did not object.

Several years later, the creditor attempted to collect the unpaid interest. The debtor asked the bankruptcy court to order the creditor to cease and desist collection action, and the case made its way to the Supreme Court. The creditor argued that the order discharging the debt was void because the debtor did not serve the creditor with a summons during the original case, and also because the bankruptcy court did not make a finding of undue hardship. In a 9-0 ruling, the Supreme Court ruled for the debtor. It held that both of the points raised by the creditor might constitute legal error, but that the creditor should have raised those points in an objection to the bankruptcy plan or an appeal of the bankruptcy court’s order confirming the plan.

The debtor did not “win” the United Student Aid case so much as the creditor “lost,” in the sense that the creditor might have prevailed had it followed the procedures for objecting to the Chapter 13 plan. Some of the Judicial Conference Advisory Committees’ proposed amendments would modify the procedures for filing and objecting to a debtor’s plan. Federal Rule of Bankruptcy Procedure 3015, for example, would require the debtor to serve a copy of the plan on the trustee and all of the creditors at the same time as filing it with the court, and would set more definite timelines for creditors to file objections. See Preliminary Draft of Proposed Amendments to the Federal Rules of Bankruptcy and Civil Procedure at 37-39 (August 15, 2013).

The bankruptcy system can offer relief to people whose required debt payments exceed their what they can pay from their available income. A debtor in a Chapter 13 case may be able to restructure bill payments into a more manageable schedule, and possibly discharge some remaining debts. Bankruptcy attorney Devin Sawdayi has helped clients in the Los Angeles area through the bankruptcy process for over sixteen years. To schedule a free and confidential consultation to discuss how we can assist you, contact us today online or at (310) 475-9399.

Web Resources:

Preliminary Draft of Proposed Amendments to the Federal Rules of Bankruptcy and Civil Procedure (PDF file), Judicial Conference Advisory Committees on Bankruptcy and Civil Rules, August 15, 2013

More Blog Posts:

With Interest Rates on Many Loans Set to Double Soon, The Dischargeability of Student Loans in Bankruptcy is a Crucial Issue for Future College Students, Los Angeles Bankruptcy Lawyer Blawg, September 23, 2013

Ninth Circuit Allows Partial Discharge of Student Loan Debt, Los Angeles Bankruptcy Lawyer Blawg, July 12, 2013

A Chapter 13 Bankruptcy Can Help You With Your Large Student Loan Debt, Los Angeles Bankruptcy Lawyer Blawg, May 21, 2013

Photo credit: By carmichaellibrary (Student Book ArtUploaded by AlbertHerring) [CC-BY-2.0], via Wikimedia Commons.