May 17 (Bloomberg) -- Former students can go to federal bankruptcy court to seek discharge of state-guaranteed loans, the U.S. Supreme Court ruled, saying sovereign immunity doesn't shield states from those cases.

The court ruled 7-2 against Tennessee's student loan corporation, which argued that it has immunity from a federal bankruptcy case filed by a former college student who seeks to avoid repaying her loan. The justices said the concept of sovereign immunity doesn't apply in bankruptcy cases.

The decision was one of two today rejecting state bids for immunity and refusing to extend a line of rulings that have insulted states from lawsuits claiming age bias, patent infringement and unfair trade practices. The court also ruled today that states can be forced to pay financial damages for failing to make courthouses accessible to the disabled.

In the bankruptcy case, the justices opted not to decide the question they originally agreed to hear -- namely, whether Congress had authority to lift sovereign immunity in student loan cases. Instead, Chief Justice William Rehnquist wrote for the court that a bid to discharge a student loan doesn't implicate state sovereign immunity at all.

``A debtor does not seek monetary damages or any affirmative relief from a state by seeking to discharge a debt,'' Rehnquist wrote. ``Nor does he subject an unwilling state to a coercive judicial process. He seeks only a discharge of his debts.''

Bankruptcy Filings

There were 1.66 million federal bankruptcy filings, including 36,183 by businesses and the rest by individuals, in the fiscal year ending Sept. 30, 2003, according to the Web site of the Administrative Office of U.S. Courts.

Pamela L. Hood, who had taken student loans backed by the Tennessee Student Assistance Corp. between 1988 and 1990, filed for Chapter 7 bankruptcy protection in 1999. The state didn't file a claim for payment, and in February 2000 she added the Tennessee loan corporation as a defendant in her effort to wipe out the $4,169 she owed the state.

Federal law typically bars ex-students from discharging their educational debt in bankruptcy. Hood is seeking to invoke an exception that allows discharge in cases of ``undue hardship.''

Tennessee argued that the U.S. Constitution doesn't authorize Congress to override states' immunity to bankruptcy lawsuits. In cases such as Hood's, the state said, a person retains the ability to try to have a debt wiped out if the state attempted to collect it through a state-court lawsuit. Tennessee was supported by 47 other states.

A bankruptcy court judge ruled against the state, as did the Cincinnati-based 6th U.S. Circuit Court of Appeals.

Divided Court

Rehnquist said sovereign immunity typically doesn't apply in bankruptcy proceedings because the focus is on the allocation of a debtor's limited assets, not the state as a defendant. He said the state is bound by a bankruptcy judge's discharge order even if government officials opt not to take part in the proceeding.

Justices Clarence Thomas and Antonin Scalia dissented. Thomas said that the case was an ``adversarial proceeding'' and that the state was immune under the Constitution.

The case is Tennessee Student Assistance Corp. v. Hood, 02- 1606.

To contact the reporter on this story: Laurie Asseo in Washington at lasseo1@bloomberg.net.

Last Updated: May 17, 2004 12:17 EDT