A Student Loan debtor who received a bankruptcy discharge on their student loans won the battle to keep his student loan bankruptcy discharge. The Supreme Court ruled that although an “undue hardship” hearing should have been held but was not held, the debtor should not be punished by taking away the bankruptcy discharge of his student loans.
The details of the case:
Espinosa took out student loans in 1988 to attend a trade school but after four years had not advanced beyond his job as an airline ramp agent in Phoenix and faced $13,250 in student debt. He declared bankruptcy.
A bankruptcy judge allowed Espinosa to discharge the debt without holding the required hearing on whether the student loan debt was imposing an “undue hardship” on him and his family. The lender, United Student Aid Funds, was alerted to Espinosa’s bankruptcy petition, and did not object.
Years later, United sued Espinosa to collect interest, saying it had been denied due process of law because there was no hearing on the burden Espinosa would have faced if he had to repay the loan. The U.S. Court of Appeals for the 9th Circuit ruled that it was enough that United had been given notice of the bankruptcy petition.
For debtors who have won discharges of their student loans in bankruptcy, the Supreme Court ruling is a powerful and fair decision. It would have been unjust to take away the debtor’s bankruptcy discharge of their student loans simply because the bankruptcy court failed to carry out a hardship hearing. It is not the responsibility of the debtor to carry out the bankruptcy court’s duties nor should the debtor be punished if the bankruptcy court fails to follow its own procedures.