Supreme Court Allows Student Loans To Be Discharged in Bankruptcy Case
Student loans are not dischargeable in bankruptcy, right? Well, not according to a new Supreme Court case which allows student loans to be discharged in bankruptcy.
Millions of Americans face a student loan debt that is simply staggering. The cost to go to undergraduate, much less graduate, school is simply ridiculous. The only way to do it these days is to borrow and borrow and borrow. This leads to students entering an incredibly weak job force with an anchor of debt around their necks. All and all, it is a tough situation.
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The basic tenant of student loans is that they cannot be discharged in bankruptcy. You’ll hear this all the time, but it is an idea that is fostered by the student loan companies. Unfortunately, it isn’t even remotely true. The bankruptcy code clearly states that student loans can be discharged if you can show “undue hardship”. What is undue hardship? Well, a court is typically looking for circumstances that reveal the person is never going to have the ability to repay the loans.
The bankruptcy of Francisco Espinosa is a bit different. He had taken out $13,000 in student loans to attend a trade school. The degree didn’t help him much at all and he was working as a baggage loader for an airline. His student loan company was given notice of his bankruptcy petition, but did not enter an objection or show up for the hearing. The court did not hold an “undue hardship” hearing and discharged the student loan debt along with other debts. Years later, the student loan company sued to recover the debt.
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The United States Supreme Court surprised many observers with its ruling. The court has tilted to a conservative judicial view, which makes it very business friendly in most rulings. Well, not in this case. The court upheld the discharge despite the fact the undue hardship hearing had not been held. The basic theme of the court’s decision seemed to be that the burden was on the company to react to the original proceeding. Since it had not, it was precluded from doing anything now.
The decision is interesting in that it shows the Supreme Court does not intend to attack the undue hardship provision. You can still discharge student loans in bankruptcy.