Bankruptcy and Student Loans: One Frustrating True Story (Part 1)

28 Oct Bankruptcy and Student Loans: One Frustrating True Story (Part 1)

This is a true story about Bankruptcy and student loans. Student loans aren’t dischargeable in bankruptcy unless you can show that having to pay them will create an undue hardship. That’s an incredibly tough burden, and in the Ninth Circuit, at least, it means you pretty much have to be permanently disabled and unable to work at all; ever.

In this story, our hero, Debtor, filed a chapter 13 bankruptcy in the early 1990s. (At that time, you could discharge student loans if they were at least seven years old, but his loans didn’t qualify.) He confirmed a Chapter 13 plan, made payments and when he received claims for the student loans, he objected. In fact it looked like one of the claims was a duplicate of another claim.

Our hero filed and served his objection to the claim properly, and scheduled a court a hearing to review it. The student loan company didn’t show up at the hearing or even submit any documentation, so the matter was resolved without testimony or argument. The judge ruled in favor of the debtor and signed an order stating that the claim was discharged.

That was in 1994, and when the debtor, after the bankruptcy was over, heard from the collection company for the student loan agency, he sent them a copy of the judge’s order and they wrote back telling him they would take no further action but refer the matter back to the loan company.

The debtor heard nothing further from the student loan agency or their collection company for over seven years. Then it started. The bills and the calls claiming the entire amount of the loan due with interest for all of those years!

What would you do? See part 2.

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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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