Letter Stating that Student Loan is “Ineligible for Bankruptcy Discharge” is False, Deceptive and Misleading Statement under FDCPA

Student loans are presumptively nondischargeable in bankruptcy.  However, student loans can be discharged in bankruptcy if a debtor demonstrates, by a preponderance of the evidence, that requiring their repayment would impose an undue hardship on the debtor.   To seek an undue hardship discharge of student loans, a debtor must commence an adversary proceeding by serving a summons and complaint on affected creditors. To succeed in such a proceeding, the debtor must show: (1) that the debtor cannot maintain, based on current income and expenses, a ”minimal” standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.

 

With this state of the law as a background, would a statement to a consumer that her/his student loan was “ineligible for discharge in bankruptcy” be deemed a false statement under the FDCPA? The Second Circuit recently responded to this question in the affirmative.

 

In  Easterling v. Collecto, Inc., 2012 U.S. App. LEXIS 18444 (2d Cir. N.Y. Aug. 30, 2012), Berlincia Easterling obtained a student loan. Approximately 4 years later she filed for bankruptcy, however, in her petition, she classified the student loan as non-dischargeable. Accordingly, her student loan was not discharged. When the debt collector for the Department of Education learned about the bankruptcy, it sent Easterling a letter advising her that her account was “NOT eligible for bankruptcy discharge. After receiving the letter, Easterling filed a claim under the Fair Debt Collection Practices Act ("FDCPA"), contending that the collection letter’s statement that her student loan was “ineligible for bankruptcy discharge” was false, deceptive, or misleading under the least sophisticated consumer standard. The District Court granted defendant/debt collector's motion for summary judgment.  Easterling appealed.

 

The Second Circuit held that the debt collector violated the FDCPA’s proscription against false, misleading, or deceptive practices by sending the debtor a collection letter incorrectly informing her that her student loans were “ineligible for bankruptcy discharge” because, although the debtor may have faced significant hurdles to discharging her student loans in bankruptcy, the least sophisticated consumer would have interpreted the letter as representing, incorrectly, that bankruptcy discharge of her loans was wholly unavailable to her. The Court concluded that the letter’s capacity to discourage debtors from fully availing themselves of their legal rights rendered its misrepresentation exactly the kind of abusive debt collection practice that the FDCPA was designed to target.

For more information about the Fair Debt Collection Practices Act, or, its state law counterpart, the Florida Consumer Collection Practices Act, visit us at: Stop Collection Harassment; or Consumer Rights Orlando

Creditors still trying to collect debts after bankruptcy

James and Shannon Humphrey filed bankruptcy on October 4, 2010 listing Bank of America as a creditor.  After the bankruptcy was filed, Bank of America, illegally contacted the Humphreys on 38 separate occasions.  Bank of America ignored protests from the Humphreys and their lawyer, telling them they didn't care about the bankruptcy and that phone calls would continue until the Humphreys contacted the bankruptcy department so Bank of America could update its computer system. The Court only penalized Bank of America $10,000 plus attorney's fees for these violations. 
Portfolio Recovery, a debt collector, purchased $1.52 billion of bankruptcy debt in 2011 for 9 cents on the dollar.   In the first quarter of 2012 alone, Portfolio Recovery reported earnings of $79,994,000 in fees collecting on bankruptcy debt.  In 2011, Capital One had to refund $2.35 million for illegally collecting on 15,500 claims already discharged in bankruptcy.  Capital One received $3.55 billion in bailout money from the federal government in 2008. EMC Mortgage -- a company purchased by JP Morgan Chase from Bear Stearns -- has illegally billed debtors in bankruptcy so often that bankruptcy judges have assessed punitive damages against it in four different court cases. Gagliardi v. EMC Mortgage, 290 B.R. 808 (Bankr.D.Colo. 2003); Curtis v. EMC Mortgage, 322 B.R. 470 (Bankr.D.Mass.2005); Castro v. EMC Mortgage, 08-01135 (Bankr.D.N.C. 2008); Harlan v. EMC Mortgage, 402 B.R. 703 (Bankr.W.D.Va.2009).   JP Morgan Chase obtained a bailout of $25 billion.   Despite reliance on the public dole to cure their own financial problems, banks have become more voracious in collecting consumer debt.

Excerpted from article written by Richard Gaudreau of the Huffington Post.

For more information about the Fair Debt Collection Practices Act, or, its state law counterpart, the Florida Consumer Collection Practices Act, visit us at:

• Stop Collection Harassment;
or
• Consumer Rights Orlando

Failure to list pending FDCPA case in subsequent bankruptcy filing dooms claim

Plaintiff incurred a debt on a Target National Bank credit card which transferred plaintiff’s debt to Defendant for collection.  Plaintiff filed a lawsuit alleging violations of the FDCPA for conduct in collecting this debt.  Approximately 6 months after filing the FDCPA lawsuit, plaintiff filed for bankruptcy using different counsel.  Plaintiff failed to list FDCPA suit as an asset in his bankruptcy Schedule B or otherwise indicate to the court or the trustee that such lawsuit existed.  In the State of Financial Affairs, the form requested plaintiff to List all suits, etc.  to which the debtor is or was a party within one year immediately preceding the filing of the bankruptcy case.  Plaintiff checked “None.”  Additionally, plaintiff did not list defendant as either a secured or unsecured creditor, but did list Target National Bank as a creditor with an unknown credit card claim. Defendant filed its motion for summary judgment on the grounds, among others, that judicial estoppel bars plaintiff from proceeding on his FDCPA.

The U.S. District Court judge granted the defendant’s motion for summary judgment on the grounds of judicial estoppels finding that the plaintiff’s actions were a deliberate attempt to deceive the bankruptcy court and manipulate the judicial system to gain an unfair advantage over his creditors, including defendant, which is exactly what judicial estoppel is designed to prevent.

Barker v. Asset Acceptance, 2012 U.S. Dist. LEXIS 77315 (D. Kan. June 5, 2012)

Post Discharge Collection Activities

Many debtors who file for bankruptcy and obtain a discharge still receive collection letters or calls from creditors.  This is a clear violation of the FDCPA.  It is anticipated that most debt collectors will claim as a defense to a FDCPA that the collection activities were a result of a bona fide error in that they had no actual knowledge of the bankruptcy.

Hyman v. Tate,  362 F.3d 965, 968 (7th Cir. 2004) holds that (a) an understanding with creditor-clients that they will not knowingly refer accounts subject to a bankruptcy filing and will notify the debt collector if they afterwards discover the fact together with (b) prompt cessation of collection efforts upon notification of a bankruptcy filing are procedures reasonably adapted to avoid errors of this kind.

In Bacelli v. MFB, Inc., 729 F. Supp. 2d 1328 (M.D. Fla. 2010), the debt collector claimed that it had no actual knowledge of the debtor's bankruptcy which fact was undisputed.   However, the Court denied summary judgment on the bona fide error defense because the debt collector/defendant presented no evidence of an agreement or understanding with the original creditor that it would not to refer accounts in bankruptcy and no evidence that its reliance on the original creditor had proved effective in avoiding errors in the past.   Lastly, the Court stated that the debt collector/defendant presented no evidence whatsoever to show that its reliance on the original creditor about knowledge of the plaintiff's bankruptcy discharge was reasonable.