J Thomas Black
Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization

In a decision that was issued in August 2012, the First Circuit Court of Appeals held that if a debtor proves that he or she does not owe the student loan debt during the bankruptcy case in a claim objection proceeding, then there is no debt for the student loan creditor to collect after the bankruptcy is over. In other words, the Bankrupty Court determination that the student loan debt had been paid, is res judicata or binding on the student loan creditor.

There was no determination that the student loan debt was an "undue hardship," but there didn't have to be. The debt was determined to not be owed. The Court stated:

In light of the foregoing, this Panel concludes that by filing the Claim Objection, Hann invoked the appropriate procedural mechanism provided by the Bankruptcy Code to obtain a determination of both the validity and amount of the Claim. The record reflects that the bankruptcy court conducted a thorough review of the Claim Objection and the Claim, which review included consideration of Hann’s testimony as well as the 2006 Hann Affidavit. This process yielded a ruling that the amount of the Claim on the date of Hann’s bankruptcy petition was zero. Accordingly, the court allowed the Claim in that amount, which we conclude is tantamount to disallowance. In light of the nature of her objection, namely, that the Claim had been paid pre-petition, we are unpersuaded by ECMC’s contention that the June 2006 Order lacks sufficient specific factual findings to support the conclusion that the bankruptcy court found that there was no obligation. The court having concluded that there is no extant claim, there can be no liability on a claim and hence no debt within the meaning of § 101(12). Thus, the June 2006 Order which is the subject of this appeal effectively precluded any further attempt by ECMC to collect on the alleged student loan debt.

It's not clear if the 5th Circuit (which includes Texas) would rule this way. But it is very convincing reasoning to me, that if a Court with jurisdiction over a claim decides that it is not due, that it has been paid, then that should be given preclusive effect. The the 1st Circuit said that in this case.

But remember, you must be able to prove that the debt was paid, or that otherwise you do not owe it, to the satisfaction of the Bankruptcy Court. The mere fact that it is not allowed as a claim in the bankruptcy case, is not enough.

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