Ignore Bankruptcy Court Notices at Your Peril

updated: 04/13/21

A student loan servicer recently learned this the hard way.  In addition to being unable to collect the nearly $417,000 it originally claimed to be owed, the student loan servicer was fined an additional $378,000 by the bankruptcy court for failing to understand the implications of bankruptcy law.

The trouble for the loan servicer began when an individual who’d borrowed nearly $300,000 to finance his children’s education. Then he filed for a chapter 7 bankruptcy on his own. As was required, the individual filing bankruptcy sent notice of the proceeding to the Department Of Education, which was the holder of the student loans at the time. By the time the court case was filed, the lender demanded that the borrower pay a total of $416,877.56 for unpaid principal, accrued interest, and collection costs.

Sometimes are special challenges discharging student loan debt. In this particular case, however, the student lender and the loan holder did not reply to notice from the bankruptcy court about the debtor’s request for discharge of the loans during the bankruptcy proceeding.  Accordingly, the debtor’s action was unopposed. The court declared the student loans to be discharged through the issuance of a default judgment against the student loan holder and its servicer.

The student loan servicer then proceeded to ignore issuance of the student loan debt discharge by the court.  Instead they sought to collect on the discharged loans, including threatening to garnish the wages of the former debtor. The bankruptcy court, none too pleased with the failure of the student loan servicer to heed the court’s prior discharge, ordered a hearing on the matter.  Again, demonstrating a deaf ear, the student loan servicer did not show up to the hearing. As a result, the court imposed an order sanctioning the servicer in an amount of $123,625.52 and ordered it to be paid to the court within 14 days.

Not surprisingly, the student loan servicer also ignored this sanctions order from the court. So the court issued a second order related to sanctions. Additionally, the court called a hearing to determine whether further sanctions should be added and the servicer should be held in contempt of court. Finally, the student loan servicer appeared in the court and claimed that its inaction of the last five years was due to “unintentional procedural error.”

The court deemed this explanation of the servicer to be “cavalier” and “wholly unsatisfactory.”  As a result, the court raised the sanctions owed by the student loan servicer to $354,629.62.  Most of these funds were used to pay off the student loan lender. An an additional $24,000.00 was ordered to be paid by the servicer to the debtor himself to compensate for five years of “negative credit ratings, aggravation, loss of sleep and worry, harassment, pain and suffering, in addition to contributing marital strain.”

All of these penalties, as well as perhaps the discharge of the original student debt, may have been avoided had the student loan servicer simply paid attention to notices from the bankruptcy court and defended its rights as a creditor using the proper procedural tools available in the bankruptcy process.  Proxifile makes it easy for creditors to defend their rights and file claims in bankruptcy. Proxifile customers never miss a court filing.

Leary Student Lender Case

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