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High Court Weighs Student Loan Case

MICHELE NORRIS, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.

MELISSA BLOCK, host:

And I'm Melissa Block.

Arguments over student loans and bankruptcy got a hearing today at the Supreme Court. The question is whether a lender can go after a borrower years after a bankruptcy judge has approved a repayment plan and the plan has been fulfilled.

NPR's legal affair correspondent Nina Totenberg reports.

NINA TOTENBERG: More than a third of American students borrow money to finance their post high school education. And the federal government guarantees most of those loans to the tune of some $618 billion. To prevent students from stiffing the lender and leaving the government holding the bag, Congress has made it very difficult to get out of repaying the loan, even in bankruptcy. The question in today's case is twofold: Can the special requirements in the bankruptcy code be effectively waved by the lender and once a bankruptcy plan is approved by the court and paid off, can the lender come back years later to get more money? The protagonist in today's case is Francisco Espinosa, a one-time baggage handler for America West Airlines who couldn't pay off the loan he's gotten to attend technical school. With a lender calling his mother to suggest she cash in her pension, Espinosa was scared, then he fell in love.

Mr. FRANCISCO ESPINOSA: When I met my current wife here, I needed to get things squared away, you know.

TOTENBERG: He filed for bankruptcy and with the approval of the bankruptcy trustee, filed a plan to repay the $13,000 principal on the loan, but not the $4,000 interest. On the steps of the Supreme Court today, Espinosa said the monthly payments were the maximum he could manage even working 60 hours a week.

Mr. ESPINOSA: I was making I think 6.70 a hour, no I would not have been able to do it any higher.

TOTENBERG: The lender, United Student Aid Incorporated, was notified repeatedly of the repayment plan in bankruptcy. It filed no objections and six months later, a bankruptcy judge approved the plan. The company did not appeal and five years later after Espinosa fulfilled the terms of the plan, the loan was discharged as paid in full. Years later though, United started dunning Espinosa for the interest, claiming that the repayment plan was illegal and void. The lender noted that the federal bankruptcy code only allows discharge of an unpaid student loan if the borrower can show undue hardship in an advisory hearing with a formal summons issued to the lender to appear in court.

A federal appeals court ruled that the company, by not objecting to the plan or appealing it, had effectively waived its right to an adversary hearing, and that it was too late now. The company appealed to the Supreme Court where today it's lawyer Madeleine Wanslee ran into a buzzsaw over the principal of final judgments. Justice Scalia: It's clear that the bankruptcy court should not have done what it did here. The only issue is having made that mistake can it be undone?

Justice Sotomayor: it was wrong, let's assume that. But how does that give you the right to undue that judgment seven years later. Answer: It's not mere error, the judgment is void because it's contradicts the language of the statute. Justice Breyer: a judgment can only be void if the court had no jurisdiction or if it had a constitutional defect, neither of which is the case here. Justice Ginsburg wondered whether the lender can waive the undue hardship determination. Can a creditor say, oh skip it, I know this person is going to be able to prove hardship, so why go through the unnecessary expense of an adversary hearing.

Answer: No. Justice Ginsburg raised a skeptical eyebrow. So, the creditor can't say I want the deal that's being proposed? I think I'm better off getting the principal and skipping the interest, I can't make that deal? Answer: No, there has to be an adversary hearing. Justice Stevens: What if there was an undue hardship affidavit, an offer of proof, would that be enough? Answer: No. Justice Kennedy: What if the lender's lawyer is in the courtroom? Answer: No, that's still not enough to satisfy the statute.

Justice Kennedy: I think that's an outstanding conclusion. However skeptical the court seemed though, it had trouble, too, with Mr. Espinosa's lawyer, Michael Meehan, in large part because he wouldn't say that the bankruptcy court judgment was wrong. I agree the judgment violated the statute, he said, but added that a creditor can still waive the right to an undue hardship hearing by not objecting or appealing. Justice Ginsburg: The net affect is that you have, by taking the failure to object as a waiver, switched the burden that Congress has put on the debtor to the creditor.

Ginsburg noted that there are other debts like student loans that are generally not dischargeable in bankruptcy, like child support and taxes. Under your argument, she told lawyer Meehan, if there is adequate notice to the lender and no objection, any debt could be discharged without full repayment. Justice Kennedy: That's the problem in this case. The lender here says that if we adopt that rule it's going to be extremely burdensome and costly on municipalities, on student loan lenders, et cetera. A decision in the case is expected next year.

Nina Totenberg, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Nina Totenberg
Nina Totenberg is NPR's award-winning legal affairs correspondent. Her reports air regularly on NPR's critically acclaimed newsmagazines All Things Considered, Morning Edition, and Weekend Edition.