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Supreme Court Rules for Debtor in Student Loan Discharge Case

In a narrow decision by the United States Supreme Court on Tuesday, the Court sided against a student-loan company, saying that the company could not collect interest on an erroneous student loan discharge by the Bankruptcy Court.

The student, Francisco Espinosa, had filed bankruptcy several years earlier. At that time, the Bankruptcy Court discharged the $5,000 in interest remaining on the loan, allowing Espinosa to pay back the $13,000 in loan principal. 

During the bankruptcy process, the student loan company, United Student Aid Funds, was given a chance to object to student loan discharge and had been alerted to Espinosa's bankruptcy petition. United, however, came after Espinosa for the interest, claiming that the notice of the bankruptcy petition was not adequate process for the student loan discharge. 

Under bankruptcy law, student loans are generally only dischargeable if the borrower can show that he or his dependents would suffer "undue hardship" should they pay back the loan.  The procedure for declaring undue hardship is essentially done through an adversary proceeding, initiated by the borrower. 

Despite the fact that there was no such hearing in Espinosa's bankruptcy case, the Bankruptcy Court discharged Espinosa's student loan interest. Essentially, it was a clerical mistake. 

And quite a lucky mistake, for Espinosa.

United argued that the notice sent by the Bankruptcy Court was not sufficient and as such, the student loan discharge was void. Espinosa's attorneys, however, argued that despite the fault in procedure, the student loan company still failed to object when given notice of the bankruptcy petition. 

Despite Espinosa's lucky break, the Supreme Court did agree with the lender on one thing: that the procedure followed by the Bankruptcy Court was in error. But to allow a creditor to avoid an entire judgment several years after the fact would cause greater problems in the administration of bankruptcy. 

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