September 22, 2019

Student Loan Discharge Case Heard by U.S. Supreme Court

student loanEarlier this month the U.S.  Supreme Court heard arguments in a case involving the question of discharge of student loans in a Chapter 13 case.   The case arose from a Chapter 13 petition filed in 1992 by Francisco Espinoza, an American Airlines baggage handler.

Mr. Espinoza’s story began in 1988.  Sensing that airline baggage handling was not a great long term career, Mr. Espinoza enrolled  in a technical school to learn computer drafting and design, and he financined his education with a student loan.  Unfortunately, he was not able to find a job using his new education and he found himself in a financial bind when American Airlines froze wages and reduced his hours.

By 1992, Mr. Espinoza found himself living paycheck to paycheck and unable to pay down his $13,000 student loan.  At that point, he contacted a lawyer and filed a Chapter 13 bankruptcy.   The Chapter 13 plan prepared by Mr. Espinoza’s lawyer provided for full payment of the balance due on the student loan over the term of the plan but it did not provide for payment of $4,000 in accrued interest or for future interest.

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Can Long Term Unemployment Support a Claim for Hardship Discharge of a Student Loan

With the economy headed south, I am hearing from more and more people who have either lost their jobs or who have been unemployed for a while with little hope of finding employment soon.  Some of these folks have outstanding student loans and they are not happy at all when the U.S. Department of Education or other student loan servicer grabs their tax refund to pay all or part of an outstanding student loan.

Unlike other creditors, student loan creditors do no have to sue you and obtain a judgment in order to collect from you.  Blog reader Nancy describes a disheartening scenario:

I am dealing with a student loan that’s 25,000.00 and the Department of Education took my tax return from me. I am a single mother with a special needs child and needed every bit of that money. I have been on unemployment since Jan of 08.  Things are not looking up for me in finding employment in my area. I am roommateing with a friend just to make ends meat here and I was told that maybe filing for a chapter 7 would be good for me. I have no credit card debt but I do have some hospital bills. Not sure what I need to do, I know that I can not afford this 25,000 student loans which by the way started out only 15,000. Interest has taken over and made it an impossible dept to pay off.  Please tell me what I should do. I also cant afford to have my taxes taken away every year from something that will never be paid off due to those interest rates.

Here is my response: As a general rule, bankruptcy is not a good tool to reduce or eliminate student loans.  [Read more…]

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