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. Great observation Smith. By my lights, speaking personally, they already have. They counted my religious perspective in a pro-life context as a symptom of mental illness and then violated all semblance of due process to banish me for life from the Indiana bar. The headline reveals the truth of the Hoosier elite's animus. Details here: Denied 2016 petition for cert (this time around): (“2016Pet”) Amicus brief 2016: (“2016Amici”) As many may recall, I was banned for five years for failing to "repent" of my religious views on life and the law when a bar examiner demanded it of me, resulting in a time out to reconsider my "clinging." The time out did not work, so now I am banned for life. Here is the five year time out order: Denied 2010 petition for cert (from the 2009 denial and five year banishment): (“2010Pet”) Read this quickly if you are going to read it, the elites will likely demand it be pulled down or pile comments on to bury it. (As they have buried me.)

  2. if the proabortion zealots and intolerant secularist anti-religious bigots keep on shutting down every hint of religious observance in american society, or attacking every ounce of respect that the state may have left for it, they may just break off their teeth.

  3. "drug dealers and traffickers need to be locked up". "we cannot afford just to continue to build prisons". "drug abuse is strangling many families and communities". "establishing more treatment and prevention programs will also be priorities". Seems to be what politicians have been saying for at least three decades now. If these are the most original thoughts these two have on the issues of drug trafficking and drug abuse, then we're no closer to solving the problem than we were back in the 90s when crack cocaine was the epidemic. We really need to begin demanding more original thought from those we elect to office. We also need to begin to accept that each of us is part of the solution to a problem that government cannot solve.

  4. What is with the bias exclusion of the only candidate that made sense, Rex Bell? The Democrat and Republican Party have created this problem, why on earth would anyone believe they are able to fix it without pushing government into matters it doesn't belong?

  5. This is what happens when daddy hands over a business to his moron son and thinks that everything will be ok. this bankruptcy is nothing more than Gary pulling the strings to never pay the creditors that he and his son have ripped off. they are scum and they know it.