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High Court Some student loans dischargeable in bankruptcy
WASHINGTON (3/26/10)--Credit unions should “be vigilant” if members that hold student loans declare chapter 13 bankruptcy. Following a March 23 Supreme Court ruling, student loan debtors could no longer need to prove “undue hardship” in a court of law to be relieved of interest associated with their student loans debts if the credit union or other student loan creditor fails to object to the discharge of student loan interest proposed in a debtor's Chapter 13 plan. Under current law, student loans are not dischargeable unless the debtor can prove “undue hardship,” and the rules for what constitutes”undue hardship" are extremely rigid. While the Supreme Court's ruling does not effect the "undue hardship" requirement per se, the Court held that the Bankruptcy Court only needs to make the "undue hardship" determination if student loan creditor requests a hearing on that issue. In the case, United Student Aid Funds, Inc. v. Espinosa, the Supreme Court decided that the U.S. Department of Education could not seek to collect student loan interest in 2000. The debtor had completed his Chapter 13 plan in 1997, under which he paid off the principle of his student loans, and the Bankruptcy Court had declared the loans' accrued interest discharged at that time. The court held that the creditor's opportunity to object to the discharge of the debtor's student loan interest, in this case, took place in 1994 when, according to the Court, the student loan creditor “received notice” of the defendant’s bankruptcy plan. That plan, which “proposed repaying the principal on his student loan debt and discharging the interest once the principal was repaid,” was forwarded to the lender by the Bankruptcy Court, and the lender “did not object to the plan or to the debtor's failure to initiate" a hearing regarding whether repayment of the interest would constitute an "undue burden." Specifically, the lender did not respond to the plan. Overall, CUNA’s Michael Edwards said, the ruling means that credit unions should more closely scrutinize the bankruptcy plans filed by members with student loans to see if the debtor is proposing to discharge student loan principle or interest and, if so, object to the plan and request a hearing on the "undue hardship" issue. This ruling would potentially affect future bankruptcy cases involving federal- and state-chartered credit unions, as well as other financial institutions which make student loans. For the full Supreme Court ruling, use the resource link.
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