San Diego: New Ruling Allows Student Loans to be Discharged in Chapter 13!

24 Jun San Diego: New Ruling Allows Student Loans to be Discharged in Chapter 13!

The United States District Court located in San Diego recently issued an opinion on December 10, 2008, holding that student loans may be discharged in chapter 13 bankruptcy cases where the creditor fails to object after receiving proper notice. Other cases around the country are also holding the same and the United States Supreme Court will be deciding a similar case this year.

In the case ofNeedelman v. Pa. Higher Educ. Assistance Agency, 399 B.R. 695, the District Court in San Diego denied a motion to dismiss by student loan creditors and instead held that the student loan was discharged in the Chapter 13 Bankruptcy. The Court even took it one step further and found that the debtor was entitled to reimbursement of payments made after the discharge order (the debtor in that case reluctantly started paying $971.01 per month after discharge to the student loan creditor).

Generally, an adversary proceeding must be filed to discharge student loans in bankruptcy and will only do so upon the finding of “undue hardship,” an extremely hard burden to meet. Yet in Needleman, no adversary proceeding was filed. Instead, the student loan was grouped together with all the other unsecured debt provided for under the chapter 13 plan, wherein such creditors would receive 28 cents on the dollar. Specifically, paragraph 10 of the plan (which is the standard plan provision) provided:

“After dividends to all other creditors pursuant to this Plan, Trustee shall pay dividends pro-rata on claims allowed unsecured herein to 28% of the amount allowed in full satisfaction thereof.”

In that case, the debtor filed a complaint in District Court after he received a discharge and requested declaratory relief whether his student loan was in fact discharged and for reimbursement for the $971.01 per month he paid for about a year. In so ruling, the District Court found that although the student loan was paid $29,197.11 on the $104,275.35 in the bankruptcy, the remaining debt of over $75,000.00 was eliminated and he was entitled to reimbursement of payments made after discharge! In doing so, it followed the Ninth Circuit case ofEspinosa v. United Student Aid Funds, Inc., 545 f.3d 1113which held:

“student loan debts can be discharged by way of a Chapter 13 plan if the creditordoes not object, after receiving notice of the proposed plan . . . and that such notice is not constitutionally inadequate.”

The facts put forth in the complaint are decidedly similar to the facts in Espinosa. Here, plaintiff alleges defendants had notice of plaintiff’s Chapter 13 bankruptcy petition, the associated Plan, the deadline for filing objections and the date of the confirmation hearing; the student loan debts were listed in the Plan but defendants did not object to the Plan’s term that “the Trustee shall pay dividends pro rata on claims allowed unsecured herein 28% of the amount allowed in full satisfaction thereon” and 0% interest allowed; plaintiff made payments under the Plan; and upon completion of the Pplan, the bankruptcy court signed a Discharge Order on May 29, 2007. (Plaintiff’s Exh. G.) Based on Espinosa,plaintiff has stated a claim that his student loan debt has been discharged, defendants may not seek enforcement of the debt, and plaintiff is entitled to reimbursement for payments made after the Discharge Order.

Accordingly, defendant Pennsylvania Higher Education Assistance Authority’s motion to dismiss isDENIED;defendant Education Credit ManagementServices’ motion to dismiss isDENIED;and defendant Key Bank, NA’s motion to dismiss isDENIED.The parties are directed to jointly contact the assigned magistrate judge within five days of the filing of this Order to schedule further proceedings as may be deemed necessary and appropriate.

This is good news! Have you received a discharge in a chapter 13 case which contained student loan creditors? If so, that debt may have been discharged entitling you to a refund of all payments made since discharge! As always, seek a competent attorney in your area to discuss such a case if you think you qualify.


Written by Michael G. Doan

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