Case concerns student loans, bankruptcy

USA Today reports:

Four years after Francisco Espinosa took out student loans to attend an Arizona trade school, he had not advanced beyond his job as an airline ramp agent in Phoenix and faced $13,250 in student debt. He declared bankruptcy, and a judge allowed him to pay off part of the loan and wipe out the remaining debt.

On Tuesday, Supreme Court justices considered Espinosa's case in a closely watched dispute that could affect debtors and creditors nationwide when student loans cannot be repaid.

Federal law says no student loan may be wiped out through bankruptcy unless the student proves an "undue hardship" in a court hearing with the institution that loaned the money. Notifying the creditor through a bankruptcy petition is usually not enough.

The idea, Justice Department lawyers say, is that the elimination of student debt should not be a matter of routine bankruptcy. Siding with Espinosa's creditor, they note the Department of Education reinsures student loans to guarantee they get repaid. Congress feared that without such guarantees and a difficult process for unloading debt, most lenders would refuse to fund higher education.

A rather important legal case.