In another unanimous decision relating to an important bankruptcy issue, the US Supreme Court today ruled that a student loan creditor’s failure to object to confirmation to a chapter 13 plan was fatal to the creditor’s post-discharge attempts to collect the debt.
The case involved a chapter debtor who included their student loan debt in their confirmed chapter 13 plan. The debtor never filed an adversary proceeding seeking a determination of undue hardship, nor was there any specific finding by the bankruptcy court that there was an undue hardship.
This particular aspect is significant: under Section 523(a)(8) (as well as Section 1328(a)(2)) of the Bankruptcy Code, student loans cannot be discharged unless the court makes a finding of undue hardship. I’ve discussed this issue in past posts because it confers a high burden of proof on the debtor.
About a month after confirmation, the chapter 13 trustee mailed the creditor a notice that stated that the “amount of the claim filed differs from the amount listed for payment in the plan.” The notice also stated that the claim would be paid as set forth in the plan, and if the creditor did not like that, the creditor was obligated to notify the trustee within 30 days.
The creditor did nothing.
The debtor eventually completed the plan and received a discharge.
When the US Department of Education attempted to collect the debt after the discharge, the debtor filed an adversary proceeding seeking enforcement of the discharge injunction. The creditor objected – claiming that the plan never should have been confirmed because it effectively discharged by declaration a student loan debt without a specific finding of undue hardship.
In this decision, the US Supreme Court has effectively stated that the creditor was right. It has also said that the creditor was wrong. And in this case, more wrong than right.
The creditor is correct in that the court found no undue hardship – nor made any specific finding of undue hardship. But the creditor was wrong to not object to confirmation of the plan. Instead, it sat there – waiting to be served with an adversary proceeding summons that ultimately never came. The Supreme Court held that since the creditor received actual notice of the filing and the contents of the plan, its due process rights were satisfied.
The US Supreme Court did take issue with the Appeals Court’s proclamation that in the event a creditor doesn’t object to confirmation, a bankruptcy court must confirm a plan that provides for discharge of student loan debts without any undue hardship determination. Section 1325(a)(1) provides that the court may confirm if the plan complies with the bankruptcy code. “[C]ontrary to the Court of Appeals’ assertion, the Code makes plan that bankruptcy courts have the authority – indeed the obligation – to direct a debtor to conform his plan to the requirements of [the Code].”
The decision is below – - and as I digest it, I’ll share my thoughts in the days ahead.
United Student Aid Funds, Inc v. Espinosa
Related posts:
- Two Cents, and Some Concerns about Espinosa
- Supreme Court Rules on Student Loans and Social Security Benefits
- Student Loans: The Financial Shackles of Higher Education
- Section 523(a)(8): Reality v. Student Loans
- When You Discover that You Are a Creditor in a Bankruptcy Case…
Tags: Chapter 13 Trustee, Creditors, Creditors Rights, Student Loans, Supreme Court
Unbelievable. I’m shocked by the creditor’s actions.
I wouldn’t say I was shocked at the creditor’s actions – I was pleasantly surprised at the ruling. I was tempted to call the article “Confirmation: The ties that bind (and sometimes gag)” but I thought better of it.