U.S. Supreme Court to review student loans discharge.

• Author: Ziemer, David

Byline: David Ziemer

The U.S. Supreme Court has granted re-view to determine whether a debtor could obtain a discharge of his student loans (non-dischargeable absent a showing of undue hardship) merely by declaring it to be a hardship, or whether he must commence an adversarial action against the creditor.

In another bankruptcy case, the court requested the Solicitor General's views on an issue that has been plaguing lower courts ever since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was enacted -- whether the BAPCPA eliminates all judicial discretion in determining a debtor's disposable income and ability to pay unsecured creditors.

Student Loans

The Seventh Circuit has held that, to discharge a student loan, a debtor must file an adversary proceeding, and show undue hardship. In re Hanson, 397 F.3d 482 (7th Cir. 2005).

Every other circuit to consider the issue had agreed with this holding, until the Ninth Circuit considered it.

In In re Espinosa, 545 F.3d 1113 (9th Cir.2008), the Ninth Circuit created a split of authority by holding that, if a debtor includes discharge of a student loan in his Chapter 13 plan, and the creditor fails to object, then the debt is discharged.

Petitioning the Supreme Court for review, attorney Charles W. Wirken, representing the lender, quoted the Seventh Circuit in Hanson: due process entitles creditors to the heightened notice provided for by the Bankruptcy Code and Rules, and the dictates of due process trump policy arguments about finality. Hanson, 397 F.3d at 486.

Claire Ann Resop, chair of the State Bar's Bankruptcy, Insolvency & Creditors Rights section, said the case is about more than just student loans, and could affect all Chapter 13 debts.

If an adversary proceeding is not required, Resop said, debtors could bury a change in a loan's interest rate in the Chapter 13 plan, say, 'here it is on page 45 of a 108 page plan,' and if the creditor fails to object, it loses.

It raises an important notice and due process issue, Resop said. The issue comes in all different types of bankruptcy cases. The court could answer the question narrowly with respect to student loans, or very broadly.

Disposable Income

Wisconsin courts considering the disposable income issue have largely concluded that the BAPCPA eliminates all judicial discretion. However, that is the minority view nationwide.

Prior to the BAPCPA, a Chapter 13 debtor was required to commit to his plan all of his...