There is a lot of chatter coming out of Washington these days about various stimulus and other social programs. There has been substantial talk and some action regarding the size, scope and availability of student loans. There is a strong likelihood that those student loan programs will be expanded in the near future. As bankruptcy practitioners know those student loans are not dis-chargeable in a bankruptcy proceeding under Section 523 of the Code except in instances of undue hardship. Rule 7001 requires a debtor to bring an adversary proceeding and that the Bankruptcy Court make a fact finding of that condition for there to be an exception to the non- discharge-ability of the of the student loan debt. That limitation might also be under Congressional attack. A current case before the Supreme Court might spur further action one way or the other.
Espinosa v. United Student Aid Funds, a Ninth Circuit case at 553 Fed. 3rd. 1193 (9th Cir. 2008) brings some of these issues to the fore. There a debtor didn’t follow the rule and file an adversary seeking a declaration of undue hardship but rather simply put into the Chapter 13 plan that the debt would be paid a set amount and that any amount over that would be dischargeable. There was no objection to the creditor’s claim and the creditor made no objection to the plan. A few years later as a result of collection efforts the issue was brought back to the court by the debtor. The court ruled that finality of the original order of confirmation in spite of the illegal provision in it trumped the due process arguments of Student Aid. The District Court reversed and then the Ninth Circuit upheld the original ruling of the Bankruptcy Court and now the case pends before the Supreme Court. If you are having a hard time understanding the process, you may consider hiring bankruptcy attorney san diego.
The creditor argues that its due process rights require the debtor to have followed the rules and filed and adversary because that are the requirements of the Rules and the Code. The debtor argues that they had actual notice because of the provisions of the Plan and their failure to object and that to allow changes to final orders after appeal times have expired would wreak havoc due to uncertainty of the effectiveness of orders or judgments. As usual the Ninth Circuit is on the cutting edge of liberal positions. The creditor further argues that when the Rules and the Code specify particular procedures they are entitled to them and that they understandably don’t need to pay attention to matters outside those parameters–why should the look at the Plan since there was no objection to their claim and no adversary was file?
If the Supreme Court rules for the creditor will the Democratically controlled Congress make amendments to overrule that decision? If the Court affirms the Ninth Circuit will that open the floodgates for all manner of trickery in Plans under Chapter 11, 12 or 13 with attempts to sneak through provisions that clearly don’t comply with the Code or Rules; this in spite of the requirements for Plan drafting that all Plans must comply with the Code and Rules.