Bankruptcy and Student Loans: One Frustrating True Story (Part 3)

30 Oct Bankruptcy and Student Loans: One Frustrating True Story (Part 3)

In Part 2, the debtor discovered that he was wrong when he thought that the judge’s order in his Bankruptcy case was a valid, final order discharging his student loan.

So, in due time, an amended complaint was filed alleging that the student load agency and their collection company should be estopped from collecting the debt or that so much time had passed they shouldn’t be allowed to go forward.

The attorney for the student loan agency filed a second motion to dismiss, this time alleging that the bankruptcy court lacked jurisdiction to hear this complaint because it didn’t arise out of a bankruptcy estate.  In fact, the bankruptcy estate was long closed, and the existence or non-existence of this debt wouldn’t affect it at all.  The debtor filed an opposition to the motion and a hearing was held.

At the hearing, the judge ruled in favor of the student loan agency’s attorney.  It seems it’s clear that the bankruptcy court can only hear cases that arise out of bankruptcy and affect the bankruptcy estate.  (There is an exception to allow the bankruptcy court to hear matters involving the automatic stay or injunction created by a bankruptcy.)   Thus, the judge dismissed the complaint, never getting to the real issue, but simply indicating that this wasn’t the proper forum for the issues. 

So, the debt still exists, and now over eight years later, the debtor will have to deal with it somehow, and all the accrued interest.  The debtor’s last remedy will be to file an action in state court alleging the estoppel and laches theories.  But, he is more than likely to run into a state court judge who will refuse to hear the matter because it started in a bankruptcy action and the federal court system has jurisdiction!    A true “catch 22” consistent with the laws making it almost impossible to avoid paying back a student loan!

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.
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