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And we're going to hear now about a case involving one student loan that has made it all the way to the United States Supreme Court. It involves a man who could not pay the loan, so he filed for bankruptcy and then stuck to a repayment plan approved by a judge. The lender says the man still owes money anyway. Here's NPR legal affairs correspondent Nina Totenberg.
NINA TOTENBERG: 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 $618 billion. And to prevent people from just walking away from their obligation, federal law makes it very hard to discharge a student loan debt - meaning not to pay 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. He enrolled in a technical school to learn computer drafting and design - after graduating, though, he couldn't find a job.
Meanwhile, America West was in trouble. It froze and then cut wages, 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 credit card or other debts, except for his $13,000 student loan, and he was in arrears on that.
Mr. FRANCISCO ESPINOSA: They were calling me and calling my mother and asking for my mother to borrow from her pension or something. You know, so when I met my wife, I wanted to, you know, get serious with her and I needed to get my finances squared away. I just can't come into a relationship and, you know, have people calling me, bill collectors.
TOTENBERG: Turning to the phonebook, Espinosa called a lawyer. The lawyer filed what's known as a Chapter 13 bankruptcy, which calls for the restructuring of a loan.
Mr. ESPINOSA: I did want to pay what I owed. I didn't want to get out of it.
TOTENBERG: The 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, Incorporated, 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, and in 1997, the bankruptcy court declared the debt paid in full.
Mr. ESPINOSA: I got my stamped release letter saying that I was paid by the court, and I thought it was over and done with at the time.
TOTENBERG: Two years later, though, United started dunning Espinosa for the interest, among other things, putting a lien on tax refunds. The dunning continued until Espinosa's lawyer asked the bankruptcy court to hold United in contempt. Finally, 11 years after the bankruptcy court had confirmed the original repayment plan, United claimed the 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, and the company asserted that to do that, the bankruptcy court had to 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, quote, "it makes a mockery of the English language and common sense" for United to claim that it was somehow ambushed or taken advantage of. United appealed to the U.S. Supreme Court, backed by the U.S. government, 24 states and the entire student loan industry.
They assert that without a finding of undue hardship, a plan discharging any part of a student loan debt is illegal and void under the law, and that if student loans can be more easily discharged, lenders would be reluctant to make such loans.
Espinosa's lawyers say that's nonsense, that 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, Espinosa says that the courts, particularly the bankruptcy courts, would be thrown into chaos if judgments had no finality and one side can appeal long after the fact.
Nina Totenberg, NPR News, Washington.
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