The U.S. Supreme Court has waded into the complexities of the student-loan industry, having heard a lender’s challenge to a court-approved bankruptcy plan that allowed an Arizona man to discharge some of his educational loan debt without proving “undue hardship,” as federal law requires.
Student loans are one of several forms of debt, including back taxes and child support, not easily discharged in bankruptcy.
The case, United Student Aid Funds Inc. v. Espinosa (No. 08-1134), involves Francisco J. Espinosa, an airline ramp agent in Phoenix who in the late 1980s received some $13,250 in student loans to attend trade school. In 1992, he filed for Chapter 13 bankruptcy protection, proposing to repay the principal—but not some $4,000 in interest. The bankruptcy court in Phoenix notified Indianapolis-based United Student Aid Funds Inc., but the lender did not object to the discharge plan.
Later, the U.S. Department of Education, as the guarantor of the loans, began collection efforts against Mr. Espinosa for the outstanding interest, but he won a ruling requiring the creditors to cease those efforts.
In an appeal to the high court, lawyers for the lender and the Obama administration said that upholding Mr. Espinosa’s bankruptcy relief would encourage many more debtors to try an end run around the legal requirements for student-loan debts.
During oral arguments in the case on Dec. 1, Toby J. Heytens, an assistant to the U.S. solicitor general, told the justices that “there is an important public interest at stake here, which is that the Department of Education is reinsuring all of these loans.”
But Michael J. Meehan, the lawyer representing Mr. Espinosa, argued that creditors and debtors should be able to agree to discharge “a portion of the student loan without a finding of undue hardship.”
The justices grilled both sides.
“You are taking a burden that Congress has put on the debtor and switching it to the creditor,” Justice Ruth Bader Ginsburg said to Mr. Meehan.
But Justice Anthony M. Kennedy wondered whether creditors could waive interests during bankruptcy proceedings, then “come in 10 years later and say, ‘This is a void judgment.’ ”
The case should be decided by July.
