SCOTUS says Bankruptcy Court can discharge student loan debt without undue hardship claim

The U.S. Supreme Court held that the Bankruptcy Court has the power to discharge student loan debt without an undue hardship claim. Justice Clarence Thomas wrote the opinion for the unanimous decision. [SCOTUSblog]

The facts:

The debtor in this case filed a plan with the Bankruptcy Court that proposed to discharge a portion of his student loan debt, but he failed to initiate the adversary proceeding as required for such discharge. The creditor received notice of, but did not object to, the plan, and failed to file an appeal after the Bankruptcy Court  subsequently confirmed the plan. Years later, the creditor filed a motion under Federal Rule of Civil Procedure 60(b)(4) asking the Bankruptcy Court to rule that its order confirming the plan was void because the order was issued in violation of the Code and Rules.

This was in 1993. The lender did not challenge the discharge until 2000.

The holding:

Rule 60(b)(4) strikes a balance between the need for finality of judgments and the importance of ensuring that litigants have a full and fair opportunity to litigate a dispute. Where, as here, a party is notified of a plan’s contents and fails to object to confirmation of the plan before the time for appeal expires, that party has been afforded a full and fair opportunity to litigate, and the party’s failure to avail itself of that opportunity will not justify Rule 60(b)(4) relief. We thus agree with the Court of Appeals that the Bankruptcy Court’s confirmation order is not void.

We are mindful that conserving assets is an important concern in a bankruptcy proceeding. We thus assume that, in some cases, a debtor and creditor may agree that payment of a student loan debt will cause the debtor an undue hardship sufficient to justify discharge. In such a case, there is no reason that compliance with the undue hardship requirement should impose significant costs on the parties or materially delay confirmation of the plan.Neither the Code nor the Rules prevent the parties from stipulating to the underlying facts of undue hardship, and neither prevents the creditor from waiving service of a summons and complaint. See Fed. Rule Bkrtcy. Proc.7004; Fed. Rule Civ. Proc. 4(k). But, to comply with §523(a)(8)’s directive, the bankruptcy court must make an independent determination of undue hardship before a plan is confirmed, even if the creditor fails to object or appear in the adversary proceeding.

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Lawyers are “debt relief agencies,” says high court

The Supreme Court ruled Monday that lawyers are “debt relief agancies,” details of which are posted at law.com.

Consumer bankruptcy lawyers are “debt relief agencies” under a 2005 federal bankruptcy law and restrictions on the type of advice they can give clients are constitutional, the U.S. Supreme Court ruled on Monday.

In a challenge brought by a Minnesota law firm, the justices unanimously held that the plain language of the Bankruptcy Abuse Prevention and Consumer Protection Act clearly indicates that lawyers function as debt relief agencies when they provide bankruptcy help to consumers covered by the law. The 2005 law was enacted to combat abuse of the bankruptcy system.

The Supreme Court case, Milavetz, Gallop & Milavetz v. U.S., actually raised three issues for the justices:

Whether lawyers are debt relief agencies.

Whether a provision prohibiting lawyers from advising clients to incur more debt “in contemplation” of filing for bankruptcy violates First Amendment free speech guarantees.

Whether provisions requiring a debt relief agency to include the sentence “We are a debt relief agency,” or one substantially similar, in all advertisements mandate unconstitutional compelled speech.

The 8th U.S. Circuit Court of Appeals had ruled in favor of the law firm only on the second issue — the restriction on lawyers’ advice. That ruling prompted a cross-petition for Supreme Court review by the government.

In her opinion for the Court, Justice Sonia Sotomayor said the law’s definition of “bankruptcy assistance” included several services commonly performed by lawyers. “Indeed, some forms of bankruptcy assistance, including the ‘provision of legal representation with respect to a case or proceeding,’ may be provided only by attorneys,” she wrote, adding that, in listing specific exceptions to the definition of debt relief agency, Congress gave no indication that it intended to exclude lawyers.

The justices also rejected the view of the 8th Circuit and the Milavetz firm that the restriction on lawyers’ advice prohibits lawyers broadly from advising a client to incur additional debt when contemplating bankruptcy even if that advice could help the person avoid bankruptcy.

Eastern District bankruptcy judges featured at Dec. 10 luncheon

Bankruptcy Judges Marci B. McIvor, Phillip J. Shefferly and Thomas J. Tucker are the featured roundtable speakers at the Eastern District Federal Bar Association Bankruptcy Section’s Dec. 10 luncheon at Cobo Hall.

The event starts with an 11:30 a.m. buffet lunch. More information here.