U.S. Supreme Court Ruling in Student Loan Case

Posted on April 12, 2010 by Christine Wilton

Back in November, I explained to you the complexities involved in discharging student loans in bankruptcy.  These rules have not changed with the latest U.S. Supreme Court ruling in the case of United Student Aid Funds v. Espinoza.  The New York Times article, Bankruptcy Ruling in Student Loan Case points to the brief submitted by United that warned of "open flood gates" if the court were to rule in favor of the debtor in this case.  All this crying on the creditor side reminds me of the story of  the boy who cried wolf.  Unfortunately, this win for the debtors will not likely amount to a broad brush approach or change the dischargeability of student loans in bankruptcy; here's why.

First, we're dealing with the underlying chapter 13 bankruptcy case where neither the Debtor, nor the judge  followed the the "undue hardship" test.  Again, remember the hurdles that I laid out in my last article on this subject, Discharging Student Loans In Bankruptcy, and you will see that the Debtor, Espinoza, did not file or serve an adversary proceeding complaint on United. 

Second, the reason the Supreme Court ruled in favor of the Debtor in this case was simply because the Creditor, United, failed to timely object or appeal the Court's confirmation of the Debtor's plan.  United received notices from the Court regarding the chapter 13 plan and the Court's approval of it, which named the only debt in the plan as the student loan and United neither objected or appealed the Court's ruling.  So, United had notice of the Court's error and took no action.  Years later, when they tried to re-open the case, it was too late.

This decision is not about student loans as much as it is about bankruptcy procedure and that two wrongs don't make a right.  This is just another tool to use to protect consumer's rights where the lenders sit on their thumbs and fail to file timely objections.  As an aside, I must note that this was a unanimous decision by the Supreme Court, which is a very rare occurrence.

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Projected Disposable Income in Chapter 13

Posted on February 22, 2010 by Christine Wilton

In determining "projected disposable income" for the purposes of creating a chapter 13 bankruptcy plan, how do we deal with debtors whose incomes have changed?  Can we just disregard that huge bonus you received; or what happens when your income goes up, or down during your bankruptcy?  How should we deal with that car you own outright?  For answers to these questions we turn to recent case law.

The court in Ransom v. MBNA (In re Ransom), 577 F.3d 1026 (9th Cir. Aug., 2009) held that an above-median income debtor seeking bankruptcy relief under chapter 13 cannot deduct from his disposable income, a vehicle 'ownership cost' for a vehicle he owns free and clear, that would otherwise be income available to unsecured creditors.  The Ransom case is one example of the court's plain reading of the statute in 11 U.S.C. Section 707(b)(2) that an ownership cost is not an 'expense.' 

The 10th Circuit court reviewed the issue of whether 'projected disposable income' for purposes of chapter 13 plan confirmation should be obtained using the "mechanical test" set forth in the Code, or a "forward looking approach."  The holding from In re Lanning, 545 B.R. 1269 (10th Cir. November, 2008) says, "The mechanical approach 'subject to a showing of substantial change in circumstances,' in other words the forward looking approach."  The Solicitor General has filed an invitation brief with the Supreme Court in the In re Lanning case. This case is currently pending before the Supreme Court.  We are forward-looking to the outcome after the Supreme Court's review.

This issue is of national concern as Craig Anderson points out in his blog article, '“Projected Disposable Income” in Chapter 13 Cases: Rearview Mirror, or Crystal Ball?'   posted at the Bankruptcy Law Network.  What these cases mean to our bankruptcy practice of chapter 13 cases is to really look at the individual circumstances of our clients.  Every case is unique.  The good news is that we have more control in chapter 13 and more options; such as timing the filing of the case; or request to modify the chapter 13 plan.  As debtor's counsel, we must have a complete understanding of our client's goals and their particular circumstances so that we may present the best argument on their  behalf.

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