Smart Borrower Blog

Should Bankruptcy Allow You to Shed Student Debt?


Dec 9th, 2009 @ 2:04 PM by Amber Nelson


Traditionally, even if you file for bankruptcy, you will still be required to repay your students loans. Almost all of them are either provided or guaranteed by the United States government and the thinking is that if bankruptcy could wipe out all or even just a portion of one’s student loans, it would encourage graduates to file more often. This would in turn make lenders less willing to offer student loans.

This issue is being heard and decided by the Supreme Court presently as it considers the case of Francisco Espinosa, a Phoenix airline ramp agent who had the interest from his student loans discharged by a bankruptcy judge more than a decade ago.

After being trained in computer drafting and graphics at a technical school, Espinosa was unable to find a job in his field and stayed working for the airlines. Soon his pay was cut there and he was no longer able to meet all his financial obligations.

Espinosa was still required to pay back the principal of the $13,250 in student loans from United Student Aid Funds, but the $4,000 in accrued interest was excused in the bankruptcy. The company was notified at the time but made no objections.

Years later United Student Aid Funds came after Espinosa for the interest, saying that the judged had erred, as the federal bankruptcy code only allows student debt to be discharged if the borrower can show “undue hardship” and that must be done during an adversary hearing with all parties involved being summoned in court.

I don’t know why United Student Aid Funds didn’t speak up during the original bankruptcy case, but the main point of the case is important. Francisco says he repaid he principal debt, the judge forgave the interest and the case is closed. United says that the ruling is void because the law was not properly followed and it should remain very difficult for student loan money to be forgiven in bankruptcy. The implications are broad for the student loan industry as a whole if the Supreme Court upholds the ruling as it would in essence mean that student debts can be discharged without formal hearings, making the process much easier for debtors.

The matter will soon be decided by the nation’s highest court and we’ll just have to see if it changes the availability of private student loan money.

About Amber Nelson
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.

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