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Supreme Court Case Doesn’t Open The Floodgates To Discharging Student Loans In Bankruptcy . The United States Supreme Court affirmed a lower court ruling that discharged Francisco J. Espinosa’s student loans in bankruptcy. The ruling was initially haled as a victory for borrowers and debtors. However, a closer look at the narrow ruling by the High Court establishes that debtors must establish that a student loan constitutes an undue hardship to discharge student loans through bankruptcy. Mr. Espinosa had taken out four student loans to attend trade school. Four years later, he filed for Chapter 13 bankruptcy, and offered a repayment plan to the court, proposing that he repay the principal over five years, without interest. The bankruptcy judge approved his proposed repayment plan. The lender received notice of the proposed plan, but failed to file an objection. The court approved the plan. The lender failed to appeal from the court’s order within the time permitted by law. Mr. Espinosa repaid the principal on the loan pursuant to the repayment plan approved by the court, and the court discharged the outstanding interest. Years later, the lender attempted to reopen the bankruptcy court case and set aside the discharge of the interest. On appeal, the lender argued that the bankruptcy court judge did not make a finding that the student loans constituted an undue hardship for Mr. Espinosa, as required by the Bankruptcy Code. In considering the case, Justice Clarence Thomas, writing for the Supreme Court specifically noted that the bankruptcy judge had erred in failing to make the required finding of undue hardship. However, because the lender had failed to timely object, and failed to file the proper appeal, the case had grown stale. “The bankruptcy court’s failure to find undue hardship before confirming Espinosa’s plan was a legal error,” Justice Thomas wrote in the majority opinion. “But the order remains enforceable and binding on United because United had notice of the error and failed to object or timely appeal.” Noting that the Supreme Court specifically found that the bankruptcy judge had committed legal error probably precludes or severely limits the precedential value of the Espinosa case. In this case, the discharge came about because the lender slept on its right to object and timely appeal. If similarly situated lenders did not already have good reason to be vigilant for debtors seeking to discharge some or all of their student loan obligations in bankruptcy, they certainly will after the Espinosa decision. Rather than being a great victory for debtors and borrowers, the Espinosa case actually reaffirmed that the Bankruptcy Code requires judges to make a determination of undue hardship. Failure to do so would constitute reversible error in other cases under different circumstances. Consequently, the Supreme Court’s decision does not open the floodgates to student loan discharges. By: Justin Michael Baxter Article Directory: http://www.articledashboard.com Justin M. Baxter Baxter & Baxter, LLP Oregon Bankruptcy

The action by the lender to small and mid-size businesses comes after a debt-exchange offer to bondholders fails and will probably wipe out government’s $2.3-billion investment in the company. CIT Group Inc., a major lender to small and medium-size businesses, filed for bankruptcy protection Sunday afternoon, a process that almost …