NYT: Bankruptcy Ruling in Student Loan Case

By ADAM LIPTAK

WASHINGTON — The Supreme Court on Tuesday made it easier for people who say they cannot repay their student loans to receive bankruptcy protection. But the case arose in an unusual way, and the ruling is unlikely to have a broad impact.

The case involved Francisco J. Espinosa, an airline ramp agent who took out four student loans in 1988 and 1989 for a total of $13,250 to attend a trade school in Arizona. Four years later, he filed for protection under the bankruptcy laws, proposing to repay the principal over five years without interest.

Neither Mr. Espinosa nor the judge who approved his proposal followed the procedures contemplated by the law. Chapter 13 of the Bankruptcy Code allows student loans like Mr. Espinosa’s to be discharged only if a bankruptcy judge finds that repayment would impose an “undue hardship.” But the judge in his case made no such finding.

Nor did Mr. Espinosa notify his lender in the way required by law, which calls for the service of a summons and complaint like those in a civil lawsuit.

But the lender did receive notices from the court about Mr. Espinosa’s proposal and the court’s approval of it. Although the loan was the only debt Mr. Espinosa listed in his proposal, the lender did not object or appeal.

Mr. Espinosa finished paying the principal back in 1997, and the bankruptcy court then discharged the interest he would have owed. Years later, the lender tried to re-open the case.

The Supreme Court’s decision on Tuesday rejected positions advanced by the federal government, more than 30 states and the student loan industry. The lender in Mr. Espinosa’s case, United Student Aid Funds, warned in a brief that a decision in his favor would “open the floodgates” to allowing others to avoid paying their debts, including “taxes, domestic support obligations, drunk driving personal injury and death liabilities, and criminal fines and restitution.”

But the court, in a unanimous decision by Justice Clarence Thomas, resolved the case on a narrow ground. It was undisputed, Justice Thomas wrote, that there had been legal misfires along the way in Mr. Espinosa’s case. The issue before the court, he said, was whether the lender had waited too long to object to them.

“The bankruptcy court’s failure to find undue hardship before confirming Espinosa’s plan was a legal error,” Justice Thomas wrote in the case, United Student Aid Funds v. Espinosa, No. 08-1134. “But the order remains enforceable and binding on United because United had notice of the error and failed to object or timely appeal.”

The rules allowing cases to be re-opened in extraordinary circumstances did not apply here, Justice Thomas wrote, as they do not “provide a license for litigants to sleep on their rights.”

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