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Friday, January 8, 2010

Student loan appeal to U.S. Supreme Court

Friends....from Westlaw caselaw updates.. The United States Supreme Court is hearing a number of bankruptcy related cases this term. Of special interest to some may be this one regarding student loans.

The United States Supreme Court has granted certiorari in United Student Aid Funds, Inc. v. Espinosa (Docket No. 08-1134), 2009 WL 646192, a case in which the Ninth Circuit Court of Appeals held that a debtor could discharge student loan debt by including it in a Chapter 13 plan, without complying with the heightened notice requirements embodied in the Bankruptcy Code and the bankruptcy rules and without initiating an adversary proceeding in which the debtor would be required to show undue hardship. In this decision, Espinosa v. United Student Aid Funds, Inc., 545 F.3d 1113 (C.A.9-Ariz. 2008), op. amended and superseded, 553 F.3d 1193 (C.A.9-Ariz. 2008), the Ninth Circuit further held that the student loan creditor's due process rights were not violated because the creditor received actual notice of the debtor's Chapter 13 case and proposed plan.

Normally an adversarial proceeding (separate lawsuit) is required to establish the undue hardship standard by which student loans are (rarely) granted a discharge in bankruptcy. Here the debtor just made it a provision in his plan. It has gone up through the appeal process and has landed at the Supreme Court of the United States for a final determination. Ultimately it probably just means that student loan servicers will be more vigilant in regard to the plan provisions that may adversely effect them and object if this type of language is included so not all that much would change substantially as it does not change the standard for discharging student loans but only would allow for another way to do it if the U.S. Supreme Court determines that a plan provision is adequate enough notice and the lender would be bound by the terms of the plan without a timely objection.

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