Decision on Bankruptcy and Student Loans

There’s an update to the Supreme Court case involving Francisco Espinosa, the airline ramp agent who tried to get rid of the interest on his student loans when he filed for bankruptcy in 1992. Espinosa has won his case, but his win doesn’t appear to have many implications for the rest of student lending. According to an article by Adam Liptak in the New York Times:

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.”

Basically it appears that because Espinosa’s repayment plan was approved, he doesn’t owe the interest. This is despite the fact that, under current rules, Espinosa’s plan probably shouldn’t have been approved.

But it doesn’t look like much will change as a result of this ruling. According to the National Consumer Law Center’s Student Loan Borrower Assistance project:

Student loans are not usually discharged in bankruptcy. It is difficult, but not impossible, to do so if you can show that payment of the debt “will impose an undue hardship on you and your dependents.”

It’s currently very, very hard to relieve student loans via personal bankruptcy. The ruling in the Espinosa case doesn’t really change this.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer