Sunday, May 9, 2010

Student Loan Debtors Can Seek Student Loan Discharge Determination Prior to Completion of Chapter 13 Plan Payments.

Cassim v. Educational Credit Management Corporation, 594 F.3d 432 (6th Cir. 2010). A chapter 13 debtor filed an adversary complaint seeking a determination that because of debtor’s disability debtor was entitled to an “undue hardship” discharge of debtor’s student loans. Debtor asserted that debtor’s student loan debts should be discharged when the bankruptcy court enters the general discharge order following completion of the chapter 13 repayment plan.

The student loan creditor sought to dismiss the adversary complaint on constitutional ripeness grounds. Creditor argued that the student loan debtor would have to wait for the entry of the chapter 13 discharge order before the debtor could file the adversary proceeding. Creditor believed a ruling prior to discharge was simply premature.

The Sixth Circuit framed the issue as whether a bankruptcy court ruling on the undue hardship discharge issue was constitutionally ripe for adjudication prior to the entry of a chapter 13 general discharge that would be entered years later, if ever, and only at the conclusion of the chapter 13 repayment plan. The Circuit Courts are split on this issue and are without Supreme Court guidance.

The Sixth Circuit found that the question of whether debtor’s student loan debt is dischargeable was constitutionally ripe for review by the bankruptcy court despite the fact that debtor had not yet received a chapter 13 general discharge under Section 1328. The court noted that debtor sought to discharge her student loan obligations under Section 523(a)(8) and creditor sought to prevent debtor from obtaining such relief. If debtor prevailed, the student loan creditor stood to lose some or all of its claim. The court therefore believed that the dispute involved a specifically-defined debt and a statutorily-based claim for relief that debtor was entitled to pursue. Consequently, the court found that the collision of these opposing interests produced a definite and substantial controversy between the parties that was currently ripe for adjudication, and not merely an abstract disagreement.

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