Student loan modifications very hard to do. Supreme Court to rule.

To protect the more than $600 billion in student loans insured by the federal government, Congress has made it very difficult to modify these loans.  Bankruptcy courts are not allowed to reduce the principle except in cases of “undue hardship;” but they do have some right to adjust payment schedules under “Chapter 13.”

Seventeen years ago, a man named Francisco Espinoza, a baggage handler for America West, tried to use the Chapter 13 provision of the bankruptcy law to adjust his student loan.  He owed $13,000 for a course in computer-aided design that had not landed him a job.  America West had cut his pay to $6 an hour, and even though he had no other debt, he could not make the payments on his student loan.

The bankruptcy court agreed that Espinoza could not make the full payments, so they eliminated $4,000 in back interest charges and set up a tentative schedule for payment of $274 a month over five years, which would cover the loan and the interest going forward.

The lender was notified of this possible decision by the court and did not respond.  Six months later the plan was made final and the lender was notified of their right to appeal.  Again, they did not respond.

Espinoza met his payments and in due course the bankruptcy court discharged the loan and ended the case.

Then, eleven years after the case was begun and two years after it was closed, the lender went to court, with the support of much of the student loan industry, to say that they should get the $4,000 in back interest because the bankruptcy court had no right to make such a ruling without an adversarial hearing.

In other words, it was the court’s responsibility to make sure that the lender showed up in court.  Sending them notices of their right to do so was not enough.  The court should have sent sheriffs to enforce summonses.

The appeals court saw the absurdity of this argument, but the Supreme Court agreed to hear the case and it will now rule.

To me this is one more example of the incompetence of today’s lenders.  They have been milking their businesses for years now.  They do not hire enough staff, they do not train them properly, and they expect the court to make up their shortcomings.

I bet those notices were never read, or at least not by anyone who knew their significance.  Or if they were read by someone who understood, that person was too busy to deal with them and buried them.

These same lenders are refusing to do loan modifications on mortgages, losing paperwork again and again, shoving phone calls  into push button hell, and generally acting irresponsibly.

It is NOT our job to fix the situation for them.

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