Last year we highlighted a Chapter 13 bankruptcy case where student loan debt was partially discharged. The bankruptcy discharge was challenged by the creditor and has made its way to the Supreme Court. Here is an overview of the decision made by lower courts last year:
In the case of (Espinosa v. United Student Aid Funds Inc., No. 06-16421, 9th Cir. 10/02/08) the court stated:
"Our long-standing circuit law holds that student loan debts can be discharged by way of a Chapter 13 plan if the creditor does not object, after receiving notice of the proposed plan, Pardee, 193 F.3d at 1086, and that such notice is not constitutionally inadequate. In re Gregory, 705 F.2d at 1123. We find it highly unlikely that a creditor whose business it is to administer student loans will be misled by the customary bankruptcy procedures or somehow be bamboozled into giving up its rights by crafty student debtors. If the creditor fails to object, it is doubtless the result of a careful calculation that this course is the one most likely to yield repayment of at least a portion of the debt. In such circumstances, bankruptcy courts have no business standing in the way. Cases such as In re Webber and In re Patton are, to that extent, overruled."
However, the creditor has challenged this assertion stating that notifying the creditor is not enough. But what they fail to mention is that the creditor was notified and given enough time to respond just like every other creditor. Should we give special consideration to student loan creditors? Should they get extra time? Should they receive extra notices and special privileges above even the IRS? What I find most troubling about this case is that Espinosa legally received a Chapter 13 bankruptcy discharge of this student loan debt but creditors are now allowed to sully his fresh financial start by challenging the discharge. No creditor should be able to come back years later and challenge a bankruptcy discharge if the debtor did nothing illegal. We will watch this case closely.