Espinosa v. United Student Aid Funds

OK, student loans are generally not dischargeable in a bankruptcy unless the debtor can pass the Brunner Test for undue hardship and bankruptcy judges frequently set up roadblocks to confirming a Chapter 13 plan that includes a student loan.  That’s what makes this decision so interesting and consumer-friendly. 

United Student Aid Funds (USAF) was sent notice by the Chapter 13 Trustee that its proof of claim of $17,832.15 would not be included and instead the payment plan to USAF was limited to $13,250.  USAF was given 30 days to object and they didn’t respond.  Espinosa finished the Chapter 13 plan and was given a discharge.  Then, three years later, USAF intercepts tax refunds due Espinosa and that’s what led to this case.  The following text are excerpts from the Ninth Circuit in Espinosa v. USAF:

“Congress made it quite clear that a creditor need only get ordinary notice of a Chapter 13 plan to be bound by its terms….We reject the idea that a creditor who is in the business of administering student loans has a constitutional right to ignore a properly served notice that clearly specifies that its debt will be dischargeable on successful completion of the plan.”

And now for my favorite part:

“The case is remanded to the bankruptcy court for reinstatement of the order enforcing the discharge injunction and for a determination whether the creditor acted willfully in violating the injunction under the standard we announced in Zilog, Inc. v. Corning (In Re: Zilog, Inc.), 450 F. 3d 996 (9th Cir. 2006).”

Espinosa v. United Student Aid Funds (In re Espinosa), — F. 3d —, 2008 WL 4426634 (9th Cir. October 2008)

This author is not an attorney and this information should not be considered legal advice.  Please consult an attorney for legal advice.