Discharge in Bankruptcy. Between 1980 and 1987, Craig Hanson borrowed funds from Great Lakes Higher Education Corp to finance his education at the University of Wisconsin. Hanson defaulted on the debt in 1989, and Great Lakes obtained a judgment against

Question

him for $31,583.77. Three years later, Hanson filed a bankruptcy petition under Chapter 13. Great Lakes timely filed a proof of claim in the amount of $35,531.08. Hanson's repayment plan proposed to pay $135 monthly to Great Lakes over sixty months, which in total was only 19 percent of the claim, but said nothing about discharging the remaining balance. The plan was confirmed without objection. After Hanson completed the payments under the plan, without any additional proof or argument being offered, the court granted a discharge of his student loans. In 2003, Educational Credit Management Corp (ECMC), which had taken over Great Lakes' interest in the loans, filed a motion for relief from the discharge. What is the requirement for the discharge of a student loan obligation in bankruptcy? Did Hanson meet this requirement? Should the court grant ECMC's motion? Discuss.

Answer 1

Discharge in bankruptcy
The bankruptcy court granted ECMC's motion, and on Hanson's further appeals, a federal district court and the U.S. Court of Appeals for the Seventh Circuit affirmed this ruling. The U.S. Court of Appeals for the Seventh Circuit explained that student loans are "presumptively nondischargeable in bankruptcy proceedings. Debtors can overcome this presumption by . . . showing that excepting the student loan debt from discharge would impose an undue hardship on the debtor or the debtor's dependents." The purpose of the requirement of a showing of undue hardship is, among other things, to afford a creditor "the opportunity of presenting an objection prior to the adjudication of its rights." As the facts in this problem indicate, "Hanson received a windfall"—a discharge of his student loan debt without a showing of undue hardship, and ECMC had no opportunity to object. This was, of course, a violation of ECMC's due process right, under the U.S. Constitution's Fifth Amendment, to "receive . . . notice before an order binding the party will be afforded preclusive effect."