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SCOTUS rules against student-loan company

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The Supreme Court of the United States clarified March 23 the discharge of federal student-loan debt in bankruptcy involving an Indianapolis-based education loan guarantor.

In United Student Aid Funds, Inc. v. Francisco J. Espinosa, No. 08-1134, the SCOTUS unanimously ruled against United Student Aid Funds' attempt to collect interest from federally guaranteed student loans discharged in Bankruptcy Court. Francisco J. Espinosa had four student loans and claimed those as his only debt when he filed for Chapter 13 bankruptcy. The Bankruptcy Court accepted his plan to repay only the principal owed, without making an undue hardship finding or having an adversary proceeding as required by Bankruptcy Code.

USA Funds received notice of the plan from the court clerk but didn't object to or appeal once it was approved. Espinosa paid off the principal per the terms of the plan, and the interest was discharged. Three years later, USA Funds attempted to collect the unpaid interest. Espinosa reopened his case asking for an order to prohibit collection of his discharged debts. USA Funds filed a cross-motion under Federal Rule Civil 60(b)(4) to set aside the order confirming the plan. The 9th Circuit Court of Appeals affirmed the Bankruptcy Court. The 9th Circuit found the Bankruptcy Court committed a legal error by not finding undue hardship in an adversary proceeding, but that didn't justify setting aside the confirmation order under Rule 60(b). This was in contrast with rulings in the 2nd and 10th Circuit Courts.

The SCOTUS granted transfer to decide whether an order that confirms the discharge of a student-loan debt without an undue hardship finding or adversary proceedings, or both, is a void judgment under Rule 60(b)(4).

USA Funds claimed it's entitled to relief because it didn't receive adequate notice of the proposed discharge of the loans. But the company received actual notice of the filing and contents of Espinosa's plan, even if Espinosa didn't serve the company with a summons and complaint, wrote Justice Clarence Thomas.

USA Funds argued that an order confirming a plan to discharge student-loan debt without an undue hardship finding is beyond the court's authority and therefore void. The justices weren't persuaded that not finding undue hardship in accordance with federal statute is on par with the jurisdictional and notice failings that define void judgments that qualify for relief under Rule 60(b)(4).

The Bankruptcy Court did commit a legal error by not finding undue hardship before confirming Espinosa's plan, but the order is still enforceable and binding because USA Funds had notice of the error and didn't timely object or appeal, the justices held.

The justices ruled the 9th Circuit went too far in holding Bankruptcy courts must confirm a plan proposing the discharge of student-loan debt without a determination of undue hardship in an adversary proceeding unless the creditor timely raises a specific objection. Discharging student-loan debt under Chapter 13 without determining undue hardship violates Bankruptcy Code. Courts must make an independent determination before a plan is confirmed, even if the creditor fails to object, or the debtor and creditor agree that there is an undue hardship, wrote the justice.

USA Funds said in a statement that the ruling provides the clarification the company has been seeking, given the disagreement among courts on the issue. USA Funds also said the ruling protects taxpayers by requiring the showing of undue hardship before discharging student-loan debt and puts Bankruptcy courts on notice regarding the law's requirements for discharge.

"Importantly, the opinion also includes strong language that puts debtors and their attorneys on notice that they will face penalties if they propose bankruptcy plans that attempt to skirt the undue hardship requirement of the federal statute," said the company.

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  1. Major social engineering imposed by judicial order well in advance of democratic change, has been the story of the whole post ww2 period. Contraception, desegregation, abortion, gay marriage: all rammed down the throats of Americans who didn't vote to change existing laws on any such thing, by the unelected lifetime tenure Supreme court heirarchs. Maybe people came to accept those things once imposed upon them, but, that's accommodation not acceptance; and surely not democracy. So let's quit lying to the kids telling them this is a democracy. Some sort of oligarchy, but no democracy that's for sure, and it never was. A bourgeois republic from day one.

  2. JD Massur, yes, brings to mind a similar stand at a Texas Mission in 1836. Or Vladivostok in 1918. As you seemingly gloat, to the victors go the spoils ... let the looting begin, right?

  3. I always wondered why high fence deer hunting was frowned upon? I guess you need to keep the population steady. If you don't, no one can enjoy hunting! Thanks for the post! Fence

  4. Whether you support "gay marriage" or not is not the issue. The issue is whether the SCOTUS can extract from an unmentionable somewhere the notion that the Constitution forbids government "interference" in the "right" to marry. Just imagine time-traveling to Philadelphia in 1787. Ask James Madison if the document he and his fellows just wrote allowed him- or forbade government to "interfere" with- his "right" to marry George Washington? He would have immediately- and justly- summoned the Sergeant-at-Arms to throw your sorry self out into the street. Far from being a day of liberation, this is a day of capitulation by the Rule of Law to the Rule of What's Happening Now.

  5. With today's ruling, AG Zoeller's arguments in the cases of Obamacare and Same-sex Marriage can be relegated to the ash heap of history. 0-fer

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