On March 16, the Consumer Financial Protection Bureau (CFPB) released a compliance bulletin entitled Unfair Billing and Collection Practices After Bankruptcy Discharges of Certain Student Loan Debts. The compliance bulletin focused on the treatment of certain private student loans following a bankruptcy discharge. It’s also another example of the CFPB’s efforts to expand bankruptcy relief for student loans.
Under the Bankruptcy Code and applicable rules, in order to secure a discharge of “qualified education loans” in bankruptcy, borrowers must bring an adversary proceeding and demonstrate that the loans constitute an undue hardship. For a number of years, federal courts have been split on whether non-qualified private education loans are also subject to the undue hardship standard in the Bankruptcy Code. The CFPB’s Bulletin weighs in on this split of authority among federal courts on this issue in favor of greater availability of discharge for certain types of private student loans.
According to the CFPB, its examiners identified servicers that did not determine whether private education loans were qualified or non-qualified and, thus, improperly returned non-qualified education loans to repayment after discharge. The CFPB states that it directed these servicers to cease collection of the discharged loans and take remedial action, including conducting a multi-year lookback and issuing refunds to affected consumers.
Key findings from the compliance bulletin include:
- According to the CFPB, examiners found that certain student loan servicers failed to maintain policies or procedures for distinguishing between loans that are discharged in the regular course of a bankruptcy proceeding and loans that require borrowers to initiate an adversary proceeding and meet the “undue hardship” standard.
- Consequently, examiners identified instances where servicers resumed collecting on loans that had been discharged.
- In these instances, CFPB examiners observed that most borrowers resumed payments, sometimes paying thousands of dollars on discharged debts.
Going forward, the CFPB stated it will focus on whether servicers: 1) continue to collect on loans that are discharged; 2) have adequate policies and procedures to identify the different types of loans; and 3) provide accurate information to borrowers about the status of their loans and available bankruptcy protections.
Notably, as discussed here, the U.S. Department of Justice (DOJ) recently released guidance to its attorneys regarding requests to discharge student loans in bankruptcy cases. The guidance developed in coordination with the Department of Education (DOE) advises DOJ attorneys to “recommend to the court that a debtor’s student loan be discharged if three conditions are satisfied: 1) the debtor presently lacks an ability to repay the loan; 2) the debtor’s inability to pay the loan is likely to persist in the future; and 3) the debtor has acted in good faith in the past in attempting to repay the loan.” We view this guidance as a further effort to promote the discharge of student loans in bankruptcy, but it remains to be seen whether courts will accept the standard set forth by the DOJ as being consistent with the “undue hardship” language in the Bankruptcy Code.