Loan Servicer Can’t be Sanctioned for Collection Activity

By Diane Davis

A loan servicer can’t be sanctioned for attempting to collect more than $35,000 in student loan debt from debtors with a court-approved Chapter 13 declaring the debt wiped out, the U.S. Bankruptcy Court for the Central District of California held.

The plan provision was inadequate to discharge Brad and Deborah Stoddard’s student loan debt, Judge Mark Houle wrote Oct. 30 ( In re Stoddard , 2017 BL 389008, Bankr. C.D. Cal., No. 6:11-bk-12917-MH, 10/30/17 ).

The Stoddards’ Chapter 13 plan had a court-approved provision stating: “The debt of American Education Services will be discharged; the school has been stripped of accreditation and is on probation.”

The plan was served on AES, but Brazos/U.S. Bank National filed a proof of claim on the debt. AES, which originally only serviced the debt, later acquired the claim after the confirmation hearing but before the order was entered.

After receiving a discharge, the Stoddards asked the court to sanction AES for trying to collect the allegedly discharged student loan debt.

The court said it couldn’t sanction AES because the debt wasn’t properly discharged and, therefore, there wasn’t a violation of the discharge order.

The language in the plan allegedly discharging the debt was ambiguous and unclear, the court said. It failed to indicate any time frame or conditions on the discharge. The language was inadequate to wipe out the debt, the court said.

But even if the language had been adequate, the discharge would be invalid without a subsequent adversary proceeding—a separate lawsuit related to the bankruptcy filed to determine dischargeability, the court said.

In addition, the actual holder of the claim, Brazos/U.S. Bank National, wasn’t identified in the plan, wasn’t served with the plan, and didn’t receive notice of the confirmation hearing. Thus, they were denied due process, the court said.

The claim was therefore still valid when it was transferred to AES, the court concluded.

David Brian Lally, Law Office of David B. Lally, Wilmington, N.Y., and Matthew D. Resnik, Simon Resnik Hayes LLP, Los Angeles, represented Brad and Deborah Stoddard. Scott A. Schiff, Soukup & Schiff, LLP, Encino, Calif., represented American Education Services; Timothy Burke represented Educational Credit Management Corporation.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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