The AP reports that the Supreme Court is going to rule on whether a person can have their student loan debt discharged in Chapter 13 bankruptcy if the creditor holding that debt gets notice of the intended plan, but fails to object. For anyone dealing with the burden of student loan debt, the story might raise a number of valid questions. Foremost might be, can a Chapter 13 bankruptcy be used to reduce student loan debt? Also, why wouldn't a creditor object to such a plan?
Unlike Chapter 7 bankruptcy, a Chapter 13 bankruptcy is used to create a "bankruptcy plan" that sets up a schedule of outlined payments by a debtor to his or her creditors. Upon successful completion of the plan through its duration (often 3 or 5 years), the debtor generally obtains a discharge of the debts provided for by the plan.
However, as those who've looked into the issue at all might be aware, it is often said that student loans debts are difficult to discharge in bankruptcy. So what happened in this Chapter 13 case? Well, sometimes debtors (unwittingly or otherwise) try to squeeze in student loan debt into their Chapter 13 bankruptcy plans to try and get such debt discharged.
Noteably, some courts have taken a dim view of such efforts, sometimes even penalizing such attempts. This is because generally student loan debt is not dischargeable in bankruptcy absent a showing of "undue hardship" by the debtor (this is much more difficult than it sounds). This showing is supposed to be attempted in what is called an "adversary proceeding", but including student loan debt in a Chapter 13 plan essentially short circuits that route (if a court allows it and the creditor doesn't object, both pretty big if's).
In the case headed up to the Supreme Court, a federal appeals court found that the creditor who got notice of the student loan debtor's plan to discharge their debt got all the notice required by law. Indeed, the creditor might have made a "careful calculation" that accepting the plan was the path "most likely to yield repayment of at least a portion of the debt."
The Supreme Court could very well look at the matter differently when it takes up the issue, and it may end up requiring that an adversary proceeding be brought and/or that a showing of "undue hardship" be made, in order to get such a Chapter 13 discharge, even if notice of a plan is given to a creditor.
- AP: Court to determine if bankruptcy hearing needed (sfgate.com)
- Appeals Court Opinion in the Case [PDF] (FindLaw)
- When You Can't Pay Your Student Loans: Cancellation, Deferment, and Forbearance (FindLaw)
- Chapter 13 Bankruptcy Overview (provided by Edward Levy, P.C.)
- Bankruptcy and Debt Center (FindLaw)
- Bankruptcy FAQs (provided by Boyle, Neblett & Wenger)