The Supreme Court looks at a “discharged” student loan

11 Dec The Supreme Court looks at a “discharged” student loan

The United States Supreme Court just heard the Espinoza case.  You may have heard about it in the news.  The debtor filed a chapter 13 case.

In his plan, he called for his student loan to be paid in full, without interest.  And the debtor did just that. He paid 100% of the loan off but no interest.  He gave notice to the student loan authorities.  They didn’t object.  Time passed.  And more time passed. Many years passed.

Finally, the student loan authorities caught up with the debtor. They demanded interest be paid.  They said that he could not discharge his student loan without suing the student loan authorities in bankruptcy and proving “substantial hardship” – this is a very difficult standard under the so-called Brunner tests.  Basically, a debtor would have to prove that he could never make any payments on the student loan because of health or economic conditions.  Espinoza could work and did.  He probably could pay off the $4000 more interest which was due over time.

The Supreme Court had to grapple with the fact that the Espinoza’s plan was obviously contrary to existing law.  On the other hand, it had to grapple with the fact that the student loan authorities came into court to complain more than 10 years after the fact.  Is this too late?  Many justices seemed to think so.

Bottom line – it looks like Espinoza won’t have to pay the rest of his interest.  But it looks like your lawyer should not try to discharge a student loan without filing an adversary proceeding and meeting the strict Brunner tests.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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