Errors in Judgment or How to Get Debts Discharged in Bankruptcy "(Il)Legally" and Other Notice Issues

Pearson Liddell Jr., Mississippi State University
Gloria J. Liddell, Mississippi State University

Abstract

ABSTRACT

ERRORS IN JUDGMENT or HOW TO GET DEBTS DISCHARGED IN BANKRUPTCY (IL)LEGALLY: A MATTER of NOTICE

On March 23, 2010, the U.S. Supreme Court decided the case of United Student Aid Funds, Inc. v. Espinosa. By this case a debtor was relieved of an obligation to pay a student loan notwithstanding the fact that the debtor had not followed the prescribed procedure for obtaining a discharge of that debt. The U. S. Bankruptcy Code (“Code”) requires that a debtor initiate an adversary proceeding to determine the dischargeability of such debts based upon a finding of “undue hardship”. This proceeding was not conducted. The Court opined that since the creditor had notice of the proceeding, the fact that the debtor failed to comply with the Code was not a hindrance to obtaining a discharge of that debt.

This paper delves into this “quirk” in the law where although a debtor in a bankruptcy proceeding may not have complied with the provisions of the Code, a discharge of certain affected debts may nonetheless be allowed. We explore various types of circumstances wherein the decision by the Court in Espinosa may be analogously applied to excuse the debtor’s regulatory compliance. The authors further explore notice requirements generally and the impact this decision may have upon creditors. Of course, the unscrupulous debtor might view Espinosa opportunistically. Yet, as the authors note, there are certainly adequate prophylactic measures in the Code to condemn any such actions that might be done with the fraudulent or dishonest intention of avoiding the payment of a debt. The paper also highlights the case of Schwab v. Reilly, which was decided by the U.S. Supreme Court on June 17, 2010, shortly after its decision in Espinosa. The authors demonstrate how the Schwab decision provides an interesting comparison with Espinosa in discussing the issue of notice.

In conclusion, the authors provide regulatory/administrative suggestions to aid in thwarting any such intended or unintended breaches of the Code.