In re: Espinosa, No. 4:92-bk-03819-EWH (Bankr. D. Ariz., June 8, 2011).
When a debt is discharged in bankruptcy, a creditor is forbidden from attempting to collect that debt. But what happens when the creditor claims the debt was wrongfully discharged?
On a remand order from the 9th Circuit to determine whether sanctions should be imposed against a creditor for violating a discharge injunction, an Arizona bankruptcy court imposed sanctions on the creditor.
In the case, the debtor, Francisco Espinosa, filed a petition for Chapter 13 bankruptcy, addressing his only debt: student loans. He proposed to pay the loan balance of $13,250 over the course of the plan, but not to pay the interest of $4,000 which had accrued.
Francisco's student loan provider did not object to the proposed plan, and the plan was confirmed. Once the plan was completed, the bankruptcy court discharged the remaining debt obligation.
Under current bankruptcy law, however, student loans may not be discharged absent a showing of undue hardship, which is a very high standard. Because of this, the Department of Education, which had subsequently undergone efforts to collect the "remaining" $4,000 debt, argued that the discharge had not wiped out Francisco's remaining debt because there had been no showing of undue hardship. Espinosa reopened his case, arguing that the discharge order was entered and that the further collection efforts were a willful violation of that order.
After several appeals, the 9th Circuit held that the creditor had violated the discharge. Although technically student loans cannot be discharged without a showing of undue hardship, the court held that if a creditor has proper notice of a proposed plan modifying its loan and does not object, the bankruptcy court should confirm the plan.
By the time the case had been to the 9th Circuit and back, Francisco had accumulated sizable attorney's fees, and also claimed to have suffered emotional distress from the process. The court held that the Department of Education knew there was a discharge in place, and therefore its collection efforts were a willful violation of the discharge injunction. Sanctions were entered in order to penalize the creditor.
