22 Jan Zombie Student Loans Arise From The Grave
Student loans made before 1998 were given new life by Congress when it eliminated the seven year discharge rule in 1998. The United States Court of Appeals for the 9th Circuit recently affirmed the right of Congress to modify discharge rules after the loan was taken out.
Prior to the change in 1998, a student loan could be discharged if the borrower had been reqired to make payments for at least seven years. After Congress changed the law, only loans proven to be an “undue hardship” could be discharged in bankruptcy.
In the case of James Lewis v. U S Department of Education the court of appeals upheld an Idaho bankruptcy court decision denying discharge of a pre-1998 student loan. The debtor had unsuccessfully argued that the retroactive application of non-dischargeability provisions enacted after the loan was made violated Article I, Section 10 of the United States Constitution, a provision that prevented the imposition of ex post facto laws or laws impairing the obligation of contracts.
In reaching its decision, the court of appeals addressed the constitutional argument by limiting the provision in question to laws passed by the states. Further, the court stated that “Bankruptcy is a legislatively created benefit, not a right, that Congress may alter or withhold at its discretion”. The court went so far as to say that “Congress is not prohibited from passing laws that impair contractual obligations. In fact, the very essence of bankruptcy laws is the modification or impairment of contractual obligations.”
This case does not hold much of a surprise for experienced bankruptcy lawyers. Judges have been denying discharge of pre-1998 student loans ever since the law was changed. However, it serves as a reminder that the discharge rules can change quickly. The 1998 legislation was passed with little or no fanfare and became the law of the land before most bankruptcy lawyers knew it was even contemplated. By keeping a sharp lookout, we may be able to stop Congress from creating more zombie debts that haunt our clients long after bankruptcy has come and gone.
Latest posts by Kent Anderson, Esq. (see all)
- What is the Automatic Stay and Who Does it Protect? - February 17, 2018
- Who gets the diamond when bankruptcy is filed? - January 19, 2017
- What is a Medical Bankruptcy? - April 2, 2016
- Tax Refunds in Bankruptcy - January 17, 2016
- Federal Bankruptcy Exemptions Now Available in Oregon - July 17, 2013