High Court Weighs Student Loan Case

The Supreme Court on Tuesday heard the case of a young man who — finding himself in dire economic straits — declared bankruptcy on his debts, which included a student loan. Then, 17 years after a court first approved his bankruptcy, the lender contacted him and said that he still owed them money.

Copyright © 2009 NPR. For personal, noncommercial use only. See Terms of Use. For other uses, prior permission required.

MICHELE NORRIS, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.

MELISSA BLOCK, host:

And I'm Melissa Block.

Arguments over student loans and bankruptcy got a hearing today at the Supreme Court. The question is whether a lender can go after a borrower years after a bankruptcy judge has approved a repayment plan and the plan has been fulfilled.

NPR's legal affair correspondent Nina Totenberg reports.

NINA TOTENBERG: More than a third of American students borrow money to finance their post high school education. And the federal government guarantees most of those loans to the tune of some $618 billion. To prevent students from stiffing the lender and leaving the government holding the bag, Congress has made it very difficult to get out of repaying the loan, even in bankruptcy. The question in today's case is twofold: Can the special requirements in the bankruptcy code be effectively waved by the lender and once a bankruptcy plan is approved by the court and paid off, can the lender come back years later to get more money? The protagonist in today's case is Francisco Espinosa, a one-time baggage handler for America West Airlines who couldn't pay off the loan he's gotten to attend technical school. With a lender calling his mother to suggest she cash in her pension, Espinosa was scared, then he fell in love.

Mr. FRANCISCO ESPINOSA: When I met my current wife here, I needed to get things squared away, you know.

TOTENBERG: He filed for bankruptcy and with the approval of the bankruptcy trustee, filed a plan to repay the $13,000 principal on the loan, but not the $4,000 interest. On the steps of the Supreme Court today, Espinosa said the monthly payments were the maximum he could manage even working 60 hours a week.

Mr. ESPINOSA: I was making I think 6.70 a hour, no I would not have been able to do it any higher.

TOTENBERG: The lender, United Student Aid Incorporated, was notified repeatedly of the repayment plan in bankruptcy. It filed no objections and six months later, a bankruptcy judge approved the plan. The company did not appeal and five years later after Espinosa fulfilled the terms of the plan, the loan was discharged as paid in full. Years later though, United started dunning Espinosa for the interest, claiming that the repayment plan was illegal and void. The lender noted that the federal bankruptcy code only allows discharge of an unpaid student loan if the borrower can show undue hardship in an advisory hearing with a formal summons issued to the lender to appear in court.

A federal appeals court ruled that the company, by not objecting to the plan or appealing it, had effectively waived its right to an adversary hearing, and that it was too late now. The company appealed to the Supreme Court where today it's lawyer Madeleine Wanslee ran into a buzzsaw over the principal of final judgments. Justice Scalia: It's clear that the bankruptcy court should not have done what it did here. The only issue is having made that mistake can it be undone?

Justice Sotomayor: it was wrong, let's assume that. But how does that give you the right to undue that judgment seven years later. Answer: It's not mere error, the judgment is void because it's contradicts the language of the statute. Justice Breyer: a judgment can only be void if the court had no jurisdiction or if it had a constitutional defect, neither of which is the case here. Justice Ginsburg wondered whether the lender can waive the undue hardship determination. Can a creditor say, oh skip it, I know this person is going to be able to prove hardship, so why go through the unnecessary expense of an adversary hearing.

Answer: No. Justice Ginsburg raised a skeptical eyebrow. So, the creditor can't say I want the deal that's being proposed? I think I'm better off getting the principal and skipping the interest, I can't make that deal? Answer: No, there has to be an adversary hearing. Justice Stevens: What if there was an undue hardship affidavit, an offer of proof, would that be enough? Answer: No. Justice Kennedy: What if the lender's lawyer is in the courtroom? Answer: No, that's still not enough to satisfy the statute.

Justice Kennedy: I think that's an outstanding conclusion. However skeptical the court seemed though, it had trouble, too, with Mr. Espinosa's lawyer, Michael Meehan, in large part because he wouldn't say that the bankruptcy court judgment was wrong. I agree the judgment violated the statute, he said, but added that a creditor can still waive the right to an undue hardship hearing by not objecting or appealing. Justice Ginsburg: The net affect is that you have, by taking the failure to object as a waiver, switched the burden that Congress has put on the debtor to the creditor.

Ginsburg noted that there are other debts like student loans that are generally not dischargeable in bankruptcy, like child support and taxes. Under your argument, she told lawyer Meehan, if there is adequate notice to the lender and no objection, any debt could be discharged without full repayment. Justice Kennedy: That's the problem in this case. The lender here says that if we adopt that rule it's going to be extremely burdensome and costly on municipalities, on student loan lenders, et cetera. A decision in the case is expected next year.

Nina Totenberg, NPR News, Washington.

Copyright © 2009 NPR. All rights reserved. No quotes from the materials contained herein may be used in any media without attribution to NPR. This transcript is provided for personal, noncommercial use only, pursuant to our Terms of Use. Any other use requires NPR's prior permission. Visit our permissions page for further information.

NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR's programming is the audio.

High Court Hears Student Loan Bankruptcy Case

Student loans are a way of life in America, and the federal government guarantees most of those loans. The question now before the Supreme Court is what the obligations of the lender and the borrower are when a student can't pay.

More than a third of students enrolled in post-high school classes borrow money to advance their education. The federal government guarantees most student loans to the tune of $618 billion. To prevent people from just walking away from their obligation, federal law makes it hard to discharge a student loan debt (that is, not pay for it). The bankruptcy code allows discharge only in cases of undue hardship, but the code does permit restructuring of a debt to make it repayable.

Enter today's test case and its protagonist, Francisco Espinosa. In 1988, he was a baggage handler for America West Airlines. He enrolled in a technical school to learn computer drafting and design, but after graduating, he couldn't find a job.

Meanwhile, America West was in trouble. It froze wages and then cut them so that by 1992, Espinosa, still in his old job, was earning just over $6 an hour. He was single, lived frugally, drove a car worth $1,200 and had no debt, aside from his $13,000 student loan, which he was in arrears on.

Espinosa says he was humiliated and scared. The lender not only called him demanding that he repay the loan, but also called his mother, suggesting she borrow from her pension.

Then he fell in love and wanted to marry.

"I needed to get my finances squared away," he says. "I just can't come into a relationship and have people calling me, bill collectors."

Repayment Plan Established

Turning to the phone book, he called a lawyer. The lawyer filed what is known as Chapter 13 bankruptcy, which calls for the restructuring of a loan. "I did want to pay what I owed," Espinosa says. "I didn't want to get out of it."

A bankruptcy trustee working with Espinosa's lawyer worked out a plan for Espinosa to pay $274 a month, which would pay off the loan plus the bankruptcy fees. But it would not pay off the $4,000 accrued interest. The lender, United Student Aid Funds Inc., was notified in writing of the proposed repayment plan. It filed no objections, and six months later, a federal bankruptcy judge approved the plan. The company did not appeal, despite being notified a second time that the plan, if fulfilled, would discharge the debt in full, without the remaining interest payments.

Espinosa lived up to the plan's requirements, paying off the debt in installments over the maximum five-year period permitted under law. In 1997, the bankruptcy court declared the debt paid in full.

"I got my stamped release letter," Espinosa says. "I thought it was over and done with at the time."

Two years later, though, United started dunning Espinosa for the interest, among other things, and put a lien on his tax refunds. It continued to try to collect the money until Espinosa's lawyer asked the bankruptcy court to hold United in contempt.

Undue Hardship Requirement

Then, 11 years after the bankruptcy court had confirmed the original repayment plan, United claimed that the plan was illegal and void.

The lender noted that the federal bankruptcy code allows discharge of an unpaid student loan only if the borrower can show undue hardship. United said that to do that, the bankruptcy court should have conducted an adversary hearing with a formal summons ordering the company to appear in court.

Espinosa's lawyer countered that the company was repeatedly notified that the plan called for nonpayment of the $4,000 in interest, that the company in essence had waived its right to an undue hardship hearing, and that in any event, the bankruptcy court's judgment was final and could not be reopened long after the deadline for appeal had passed.

A federal appeals court ruled against United, declaring that "it makes a mockery of the English language and common sense" for United to claim that it "was somehow ambushed or taken advantage of." Backed by the U.S. government, 24 states and the entire student loan industry, United appealed to the U.S. Supreme Court.

United argues that without a finding of undue hardship, a plan discharging any part of a student loan debt is illegal and void under the law. If student loans could be more easily discharged, they say, lenders would be reluctant to make such loans.

Espinosa says that's nonsense; only a small part of the debt here was discharged — too small a part to require an adversary hearing if the company didn't object. Backed by the National Association of Bankruptcy Trustees, he says that courts, particularly bankruptcy courts, would be thrown into chaos if judgments had no finality and one side could appeal long after the fact.

Now the Supreme Court will decide.

Comments

 

Please keep your community civil. All comments must follow the NPR.org Community rules and terms of use, and will be moderated prior to posting. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.

Support comes from: