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The United States Supreme Court recently decided for a litigant whose student loan interest was included as discharged in his chapter 13 bankruptcy plan. Federal bankruptcy law, 11 USC 523(a)(8), prohibits discharge of student loans absent a finding of ‘undue hardship’ by the bankruptcy judge. In this case though, the bankruptcy judge confirmed the chapter 13 plan without requiring the debtor to prove ‘undue hardship.’ The student loan lender did not object to the plan prior to the confirmation of the plan and thus, according to the Supreme Court, the confirmed plan was binding even as to the student loans.
At the Supreme Court oral arguments, Justice Clarence Thomas said that even though the bankruptcy judge made a serious error by confirming a plan that included non-dischargeable student loan interest debt without a finding of ‘undue hardship’ by the bankruptcy judge, that error was not so serious as to void the confirmed chapter 13 bankruptcy payment plan. The Court also found that the student loan lender could not justify using Rule 60(b)(4) to to void the confirmed plan because the lender failed to participate in the plan objection process in bankruptcy court.
This is a very limited issue and will probably have little impact in your potential chapter 13 bankruptcy. What I expect is that student loan lenders will be more proactive in monitoring cases where the student loan lenders are listed as creditors. In other words, they will not ‘fail to object’ as this lender did as to avoid this problem in the future. BUT if the student loan lender fails to object to a plan that calls for even your complete student loan, principle and interest, to be discharged, if the Bankruptcy judge makes the mistake of confirming the plan (improbable now after this decision) then your loans could be discharged under this decision.
What does this mean for you?
This means that ONLY if the lender does not object to the plan, and your bankruptcy judge makes the mistake of confirming a chapter 13 plan that calls for discharge of student loan debt without an ‘undue hardship’ hearing, will you be able to discharge your student loan debt absent a finding of ‘undue hardship.’
The opinion is available here under ‘United Student Aid Funds v. Espinosa’
To determine if your student loans are eligible for discharge, please contact the Bankruptcy Defender for a free consultation.
