Supreme Court Rules In Student Loan Debt Case Finding himself unable to pay debts he had accrued as a student, a young man declared bankruptcy through the courts. Years later, the lender said that the debt had not been forgiven altogether. On Tuesday, the Supreme Court ruled unanimously in favor of the man.
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Supreme Court Rules In Student Loan Debt Case

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Supreme Court Rules In Student Loan Debt Case

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Supreme Court Rules In Student Loan Debt Case

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ROBERT SIEGEL, host:

A unanimous ruling from the U.S. Supreme Court today: When a lender fails to object to a bankruptcy plan and files no timely appeal, the lender can't come back years later seeking to collect the unpaid debt. The court refused to disturb a bankruptcy plan in a student loan case even though the court said the bankruptcy judge had made a mistake.

NPR legal affairs correspondent Nina Totenberg reports.

NINA TOTENBERG: Student loans are big business in America. More than a third of those enrolled in post-high school classes borrow money to advance their education. The federal government guarantees most such loans to the tune of some $818 billion. And to prevent people from just walking away from their obligations, federal law makes it very hard to get out of paying the money back.

Enter Francisco Espinosa, a one-time baggage handler for America West, who couldn't pay off the loan he got to attend technical school. With the lender calling his mother to suggest she cash in her pension, Espinosa was scared, and then he fell in love.

Mr. FRANCISCO ESPINOSA: When I met my wife, I wanted to, you know, get serious with her, and I needed to get my finances squared away. I can't just come into a relationship and, you know, have people calling me, bill collectors.

TOTENBERG: Espinosa had no debts except his student loan, but he was making less than $6.70 an hour. So he filed to restructure the loan under the bankruptcy law, agreeing to repay the $13,000 loan over five years, but not to repay the $4,000 due in interest and penalties.

The lender, United Student Aid Incorporated, was notified repeatedly of the repayment plan in bankruptcy. It filed no objection, nor did it appeal the bankruptcy court order approving the plan. But years later, after Espinosa fulfilled the terms of the plan and had his debt formally marked paid by the court, United went after him for the unpaid interest.

United contended that the bankruptcy court had made an error because it made no finding that requiring repayment including interest would impose an undue hardship on Espinosa. Today, though, the U.S. Supreme Court ruled that because United was notified repeatedly of the plan and failed to object at the time, it is out of luck now. Writing for a unanimous court, Justice Clarence Thomas said even though the bankruptcy court did make an error in not finding undue hardship, that's not a license for United to, quote, "sleep on its rights" and come back after the plan has become final and the debt repaid.

Mr. HENRY HILDEBRAND (Bankruptcy Trustee): The message in this decision that Justice Thomas issued is: Once an order goes down, as long as there's adequate notice of the order, it's final. If you don't appeal the order, then the order stands.

TOTENBERG: Henry Hildebrand, who wrote a brief on behalf of bankruptcy trustees, says today's ruling extends far beyond student loans or any one provision of the bankruptcy code.

Mr. HILDEBRAND: It goes to the finality of the bankruptcy court order that does anything.

TOTENBERG: In short, today's ruling applies to any bankruptcy matter, whether it's GM, the local shoe store or a single-student borrower and lender. George Washington University Associate Dean Alan Morrison says that the decision also imposes an additional duty on bankruptcy judges in approving a student loan repayment plan.

Mr. ALAN MORRISON (Associate Dean, George Washington University): The bankruptcy judge has an affirmative obligation to oversee the process in a way that it does not with regard to other debts. They will have to look at it with more care than some of them have done.

TOTENBERG: In short, the bankruptcy judge should not just rubber-stamp a repayment plan that, like Mr. Espinosa's, provides for only partial repayment unless there is a formal finding of undue hardship. Congress, said the court, went out of its way to treat student loan debts differently from other debts, and the law only permits a restructuring of the loan when full payment would impose an undue hardship. That said, lenders may realize that they can't get blood out of a stone and they may agree to partial payment, knowing that that's the best they can hope for. But, the court said, lenders cannot have their cake and eat it, too. They cannot remain silent when a plan is approved and then object years later.

Nina Totenberg, NPR News, Washington.

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