A recent decision by the Second Circuit underscores the importance to debt collectors of accurately describing the options available to a student loan borrower in bankruptcy, even a borrower who previously filed but did not seek the determination of undue hardship that would have been a necessary predicate to any discharge.
In Easterling v. Collecto, Inc., decided on August 30, 2012, the Second Circuit examined a letter that apparently included a banner stating:
*****ACCOUNT INELIGIBLE FOR BANKRUPTCY DISCHARGE *****
Your account is not eligible for bankruptcy discharge and must be resolved.
In doing so, the Second Circuit concluded that in the circumstances at issue the letter would be false, deceptive, or misleading to the least sophisticated consumer because it could lead the consumer to believe that he or she could never obtain a discharge in bankruptcy.
The facts were fairly straightforward. Easterling had previously filed for bankruptcy, but had listed her student loan debt as “not dischargeable” and had made no effort to eliminate the debt in the course of the bankruptcy proceeding. Collecto was aware of that, and, in fact, its practice was to suspend collection activity on learning that a borrower had filed for bankruptcy. Moreover, its practice was to send a federal student loan account back to the Department of Education in the event of a discharge. Only when there was a bankruptcy filing and no discharge would Collecto send the letter at issue.
In contrast to the facts, the bankruptcy rules were fairly technical. There is a presumption that certain student loan debt cannot be discharged. To overcome that presumption, and to eliminate her debt, Easterling would have had to seek a finding of undue hardship in an adversary proceeding. That would have required her to show that she could not have maintained a minimal standard of living if she had to pay the loan, that the situation was likely to persist for a significant portion of the repayment period of the loan, and that she had made a good faith effort to repay the loan. As noted, she had not done so.
Where did that leave Easterling? Even though almost seven years had passed between the time of her bankruptcy and the time she received the letter, she still had the legal right to file to reopen her prior bankruptcy in order to seek a discharge of the loan and she still had the legal right to initiate a new bankruptcy in order to seek a discharge of the loan in the new proceeding. Because a debtor in her situation would still be able to seek a discharge, the Second Circuit concluded that the letter would be false, deceptive, or misleading to the least sophisticated consumer, who could reasonably interpret it to mean that the account would never be eligible for discharge.
Thus these messages from the Second Circuit: Don’t confuse a presumption against a discharge with eligibility for a discharge, and, even though a discharge may be hard to obtain, don’t say a debt is ineligible for a discharge unless it is – under all possible circumstances.
Ballard Spahr lawyers regularly consult with their clients engaged in consumer debt collection on compliance with the Fair Debt Collection Act and state debt collection laws. As we summarized in a prior legal alert, the Consumer Financial Protection Bureau has issued a proposal to supervise certain debt collectors and debt buyers as “larger participants.” The CFPB will soon be examining debt collectors and debt buyers who qualify as “larger participants.” We are currently conducting compliance reviews for debt collectors and debt buyers in anticipation of their first CFPB examinations.
Ballard Spahr’s Consumer Financial Services Group produces CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe, use the link provided to the right. The group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).