Category Archives: Educational News

Student Loan Debtors Seek High Court Standard In Debt Discharge

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Consumer advocates are calling on the U.S. Supreme Court to provide a uniform, nationwide standard for what debtors must prove to eliminate student loan debt in bankruptcy.

Wiping out student loan debt through bankruptcy is exceedingly difficult. The bankruptcy code requires proof of “undue hardship” to shed student loan debt, a term that’s generated widely disparate interpretations from federal appeals courts.

Now, groups like the Center for Responsible Lending and the National Consumer Bankruptcy Rights Center are rallying around a case from the U.S. Court of Appeals for the Fifth Circuit that the justices are being asked to consider.

Bankruptcy law is supposed to be uniform, yet courts’ interpretations of the undue hardship standard is anything but. The Supreme Court could change that, if Congress doesn’t act first.

“This widely varying application of the Bankruptcy Code undermines its uniformity and undercuts the Code’s promise of relief to the honest, but unfortunate debtor,” the National Consumer Bankruptcy Rights Center and the National Association of Consumer Bankruptcy Attorneys said in a joint brief asking the Supreme Court to take up the case.

The variance among appellate courts means eliminating student debt in bankruptcy now depends less on debtors’ circumstances than where they live.

One nine-year study released in 2016 found that 54% of Chapter 7 debtors in the First Circuit were able to prove undue hardship, compared with just 24% in the Third Circuit.

“You have wildly different outcomes,” said Tara Twomey, executive director of the National Consumer Bankruptcy Rights Center.

Some courts require a debtor to prove “intolerable difficulties” or a “total incapacity” to ever repay the loans. Others seek “a certainty of hopelessness.”

A minority of the appellate courts take a more lenient approach, simply looking at the “totality of the circumstances.”

Outstanding student debt now totals about $1.7 trillion and millions of borrowers are in default. A more uniform and realistic standard could help ease the staggering burden debtors now face, their advocates say.

Brunner Test

Most circuits determine what constitutes undue hardship using a three-prong test from a 1987 Second Circuit decision, Brunner v. New York State Higher Education Services Corp. Over time, courts in different parts of the country have added their own criteria.

Under the Brunner test, undue hardship requires a debtor to prove 1) repaying the loan would make a “minimal” standard of living impossible; 2) the inability to pay is likely to persist; and 3) a good faith effort had been made to repay the loan.

The Fifth Circuit case that’s appealed to the Supreme Court comes from Thelma McCoy of Galveston, Texas, who was 59 when she filed for bankruptcy and sued to eliminate more than $345,000 in student loan debt.

McCoy said her Ph.D. in social work took longer than expected when a head-on collision with a drunk driver put her in a wheelchair for two years. After a divorce, a freak spa accident also left her with severe facial burns that made it difficult to find work, she said.

By the time she filed for bankruptcy, she was earning less than $10,000 per year and facing $2,200 in monthly student loan payments.

The bankruptcy court denied her request to eliminate the debt, saying she failed to prove “that her inability to repay will persist.”

McCoy says the the Fifth Circuit’s interpretation of “undue hardship” in Section 523(a)(8) of the bankruptcy code unfairly prevents borrowers from getting a fresh start.

“There is some growing frustration in the lower courts, at least, about the impact of the Brunner test on people who are really struggling,” said Susan L. DeJarnatt, a professor at Temple University Beasley School of Law.

When the Second Circuit decided Brunner, the law only required debtors to prove undue hardship if they wanted to discharge student loans earlier than five years after repayment was due. Congress later extended the waiting period to seven years, then eliminated it entirely in 1998.

With that waiting period now gone from the law, debtors have to prove that they will face undue hardship forever, DeJarnatt said.

Different Outcomes

Over time, some courts added their own criteria to Brunner, while others have rejected the test entirely. Every circuit puts its own “gloss” on the Brunner test, and “once the circuit adopts the gloss, then all the lower courts are bound,” Twomey said.

In Maine, for example, the bankruptcy court applied a “totality of the circumstances” standard to allow a 64-year-old mental health counselor with progressive hearing loss to eliminate $107,000 in student loan debt.

Last year, a Navy veteran who filed for Chapter 7 in the U.S. Bankruptcy Court for the Southern District of New York—within the Second Circuit’s jurisdiction—was able to eliminate $221,385 in student loan debt. The bankruptcy court in that case applied the Brunner test, but without the “punitive standards” it said some other courts have imposed.

The Fifth Circuit, which covers McCoy’s home state of Texas, is known to have one of the harshest interpretations of Brunner, said John Patrick Hunt, a law professor at the University of California, Davis. In addition to the Brunner test, the court requires a showing of “total incapacity” to ever pay the loan.

A bankruptcy court judge in the Fifth Circuit once wrote that the law in that circuit poses such “an incredibly high burden” on debtors that in 15 years, he had never been able to discharge student loan debt over a lender’s objections.

“It would be helpful to have some consistency,” said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade association representing student loan servicers. “It used to be that there was a lot more consistency in interpretation.”

Student loans are treated differently than other debt because there’s no collateral and the payoff of the investment continues for a lifetime, Buchanan said.

Without consistency, loan servicers would need to start pricing loans differently in different parts of the country, Buchanan said. So a consistent standard, whether Brunner or otherwise, would be helpful to the industry, he said.

Congress vs. Courts

The Fifth Circuit says it’s up to Congress, not the courts, to revise the standards for student loan debtors.

Because student loans are backed by taxpayers, Congress intentionally made them hard to eliminate, the appeals court said in a 2019 opinion. The Fifth Circuit’s “demanding standard” fulfills that intent, it said.

There are signs that Congress might act soon.

Sen. Elizabeth Warren (D-Mass.) is expected to reintroduce a consumer bankruptcy reform bill that would allow student loan debt to be discharged on terms equal to most other types of debt. The Senate also is drafting a resolution calling for President Joe Biden to take executive action to cancel $50,000 of student loan debt for every borrower.

The courts historically are “hesitant to legislate from the bench” if Congress is about to advance a bill, said Jarret P. Hitchings, a commercial finance and corporate restructuring attorney at Duane Morris.

Nevertheless, the McCoy case comes at a “watershed moment” for student loans, he said.

“When this section of the bankruptcy code was adopted, you didn’t have such large numbers of student loan borrowers, and you didn’t have trillions of dollars in student loan debt,” he said.

CFPB Releases 2020 Fair Lending Report

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The CFPB recently released its 2020 Fair Lending Report.  The report highlights the CFPB’s work in 2020 around fair lending during the COVID-19 pandemic and its resulting economic consequences.

As part of its risk-based prioritization process for 2020, the CFPB focused its fair lending supervision efforts on mortgage origination, small business lending, and student loan origination.  As in previous years, the CFPB’s mortgage origination work continued to focus on redlining, assessing discriminatory practices in the underwriting and pricing processes, and HMDA data integrity and validation reviews.

The report highlighted two public fair lending enforcement actions.  The first action involved allegations of illegal redlining that discouraged prospective applicants living or seeking credit in certain African American neighborhoods.  Litigation in this matter is ongoing.  In the second action, the CFPB settled with a company to resolve allegations of inaccurate HMDA data about mortgage transactions for 2016 and 2017.  The report also noted other pending enforcement actions, including those involving potential discrimination in several markets, including student lending, payday lending, credit cards, and mortgage lending.

The report described the work the CFPB has done in connection with Section 1071 of the Dodd-Frank Act, which requires financial institutions to compile, maintain, and submit data for credit for women-owned, minority-owned, and small businesses.  The CFPB has collected comments and recommendations from representatives of small entities that it will consider when drafting implementing regulations.

In 2021, the CFPB expects to focus on fair lending and efforts to address racial equity for underserved communities that will be covered in the report released in 2022.

3rd Circuit Rules Collection Letter’s Itemization Of Zero Balance For Interest And Other Fees Not Confusing Or Misleading

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On April 12, the U.S. Court of Appeals for the Third Circuit affirmed dismissal of an FDCPA action, concluding that itemized breakdowns in collection letters that include zero balances for interest and other fees would not confuse or mislead the reasonable “unsophisticated consumer” to believe that future interest or other charges would be incurred if the debt is not settled. The defendant management company sent a letter to the plaintiff claiming he owed amount $1,088.34 and offered to “resolve this debt in full” with a payment of $761.84. The plaintiff filed a putative class action against the defendant alleging that by itemizing interest and collection fees for his “static debt,” and by assigning “$0.00” interest, the letter falsely implied—in violation of § 1692e and § 1692f of the FDCPA—that “interest and fees could accrue and thereby increase the amount of his debt over time.” The defendants moved to dismiss for failure to state a claim. The district court dismissed the complaint with prejudice, declining “to require assurances by debt collectors that itemized amounts ‘will not change in the future,’ reasoning that doing so would lead to ‘complex and verbose debt collection letters’ that would confuse consumers.”

On appeal, the 3rd Circuit agreed with the district court. Specifically, the appellate court concluded that the “complaint fails to state a claim, whether our court’s ‘least sophisticated debtor’ standard is functionally the same as the ‘unsophisticated debtor’ standard applied by other Circuits or is instead an independent and less demanding framework.” Moreover, the appellate court noted even the least sophisticated debtor understands that “collection letters—as reflected by their fonts, formatting, content, and fields—often derive from templates and may contain information not relevant to his or her particular situation.” According to the 3rd Circuit, “FDCPA case law does not support attributing to the least sophisticated debtor simultaneous naïveté and heightened discernment. Were we for some reason constrained to consider only the law of Circuits that employ the word “least” in their FDCPA standards, we would still affirm.”

5th Cir. Holds FDCPA Plaintiff Not Entitled To Attorney’s Fees Following Settlement

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The U.S. Court of Appeals for the Fifth Circuit recently affirmed a trial court’s denial of an award of attorney’s fees to a debtor who settled his claims against a debt collector for purported violations of the federal Fair Debt Collection Practices Act and parallel state law consumer protection statutes.

In so ruling, the Fifth Circuit concluded that the fee-shifting provision under the FDCPA for a “successful action to enforce the foregoing liability” requires that a lawsuit generates a favorable end result compelling accountability and legal compliance with a formal command or decree under the FDCPA, 15 U.S.C. 1692, et seq., and that reaching settlement before any such end result does not entitle a plaintiff to an award of attorney’s fees under the statute.

A copy of the opinion in Tejero v. Portfolio Recovery Assoc, et al is available at: Link to Opinion.

A consumer sued a debt collector for purported violations of the FDCPA and parallel provisions of Texas state law. After the parties’ cross-motions for summary judgment were denied on the basis that triable issues of fact existed, the parties reached a settlement before trial wherein the debt collector agreed to waive the outstanding debt (approximately $2,100) and pay $1,000 damages.

After apprising the trial court of the settlement, the court entered sanctions against the debtor’s attorneys, ordering thousands of dollars in costs and fees and reporting them to the disciplinary committee of the U.S. District Court for the Western District of Texas for purportedly bringing the case in bad faith. See Tejero v. Portfolio Recovery Assocs., L.L.C., 955 F.3d 453, 457.

The debtor appealed, and the Fifth Circuit reversed the imposition of sanctions for abuse of discretion and remanded for the trial court to determine in the first instance whether the debtor’s favorable settlement entitled him to attorney’s fees under the FDCPA. Id. at 462-463. The district court said no, which led to the instant appeal.

In this appeal, the sole question before the Fifth Circuit was whether the trial court erred in refusing the debtor’s fee application under the FDCPA.

The United States generally employ the “American Rule” wherein “[e]ach litigant pays his own attorney’s fees, win or lose,” but this general rule can be altered or amended by statute or contract. Hardt v. Reliance Standard Life Ins. Co., 560 U.S. 242, 253 (2010).

As you may recall, the FDCPA authorizes fee shifting, allowing a plaintiff to recover reasonable attorney’s fees as determined by the court with costs “in the case of any successful action to enforce the foregoing liability.” 15 U.S.C. § 1692k(a)(3).

To determine whether such an award was merited here, the Fifth Circuit first turned to the dictionary definition of “successful” — a “favorable outcome,” or favorable end result. Successful, American Heritage Dictionary 1740 (5th ed. 2011); OutcomeId. at 1251. “Successful” modifies the word “action” in the statutory language—the “lawsuit” in this case—thus requiring a favorable end or result from a lawsuit, not merely success in vacuo. Next considering the infinitive phrase “to enforce the foregoing liability,” “enforce” expresses the purpose of the “successful action,” and thus, the action must succeed in its purpose of enforcing FDCPA liability.

Read together, the Fifth Circuit stated that a “successful action to enforce the foregoing liability” means a lawsuit that generates a favorable end result compelling accountability and legal compliance with a formal command or decree under the FDCPA.

Here, the appellate court determined that because settlement was reached before the lawsuit reached any end result, let alone a favorable one, the debtor won no such relief, and the debt collector avoided a formal legal command or decree from the lawsuit.

The debtor argued that his “action” was “successful” because he settled for $1,000, which are the statutory damages allowed by the FDCPA. The Fifth Circuit rejected this alternative interpretation because it was resolved by settlement agreement that did not “enforce” FDCPA “liability” because it did not compel the debt collector to do anything. Adopting such a position would improperly rewrite Congress’s statute to authorize fee-shifting “in the case of any successful plaintiff.”

The Fifth Circuit also declined to apply the catalyst theory to the FDCPA’s fee-shifting provision, as a “successful action” under 15 U.S.C. § 1692k(a)(3) notwithstanding its inapplicability to “prevailing party” statutes.

As you may recall, the catalyst theory posits that a plaintiff succeeds “if it achieves the desired result because the lawsuit brought about a voluntary change in the defendant’s conduct” (Buckhannon Bd. & Care Home, Inc. v. W. Va. Dep’t of Health & Hum. Res., 532 U.S. 598, 601 (2001)).

The Fifth Circuit declined to adopt that interpretation here because “prevailing party” and “successful party” are synonymous phrases carrying similar legal salience, requiring a formal lawsuit, success in that lawsuit, and some form of judicial relief (as opposed to private relief) that enforces the winner’s rights (Prevailing Party, Black’s Law Dictionary 1232), and such an interpretation would also disrupt recent circuit precedent and the Supreme Court’s mandate that fee-shifting statutes must be interpreted consistently. Buckhannon, 532 U.S. at 603.

Because the debtor’s lawsuit was not a successful FDCPA action as defined by section 1692k(a)(3), the Fifth Circuit held that the trial court correctly determined that he was not entitled to fees, and its denial of attorney’s fees was affirmed.

11th Cir Holds FCRA Claim Is Subject To Arbitration Provision

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Comcast moved to compel arbitration under the 2016 Subscriber Agreement. Hearn opposed the motion arguing that the 2016 Subscriber Agreement no longer controlled and therefore, the arbitration provision was not valid. He also argued that the FRCA claim was unrelated to the 2016 Subscriber Agreement and that the arbitration provision itself was overly broad.  Specifically, Hearn contended that he was not seeking to reconnect or reinstate services but rather open a new account.  Comcast argued that Hearn was seeking reinstatement or reconnection services as defined in the Reconnection Provision of the 2016 Subscriber Agreement.  The District Court denied the motion to compel arbitration finding that the 2016 Subscriber Agreement did not apply as Hearn attempted to open a new account.  The District Court also held that the scope of the arbitration provision, which included “any claim or controversy related to Comcast, including but not limited to any and all … claims that arose before this or any prior Agreement, … claims that arise after the expiration or termination of this Agreement”, was too broad. Id. at *1-2.  Comcast appealed.

The Eleventh Circuit reversed the District Court’s ruling.  In framing its opinion, the Eleventh Circuit placed a significant emphasis on the Federal Arbitration Act which favors the enforcement of arbitration agreements. Id. at *3. The Eleventh Circuit has held that there is “nothing unusual about an arbitration clause … that requires arbitration of all disputes between the parties to the agreement,” when the agreement “evidenced a clear intent to cover more than just those matters set forth in the contract.” Bd. of Trs. of Delray Beach Police & Firefighters Ret. Sys. v. Citigroup Glob. Mkts. Inc., 622 F.3d 1335, 1343 (11th Cir. 2010).

Here, however, the Eleventh Circuit declined to reach the issue as to whether the “full scope of the Arbitration Provision is enforceable” even if the dispute arose after termination of the subscriber agreement. Instead, the Eleventh Circuit found that the FCRA claim related to the 2016 Subscriber Agreement and thus was arbitrable.  In rejecting Hearn’s characterization of the transaction as seeking to open a new account rather than reconnecting services, the Eleventh Circuit held that the 2016 Subscriber Agreement contemplated the reconnection of services after termination at the same address and under that contractual provision “Comcast was able to conduct a credit check only because of its previous relationship with Hearn.” Hearn, 2021 WL 1246263 at *4. The Eleventh Circuit reasoned that regardless of how service is terminated, under the 2016 Subscriber Agreement’s Reconnection Provision, Comcast is able to use the credit inquiries provision of the 2016 Subscriber Agreement. Therefore; Comcast “conduct[ing] a credit check after Hearn called to inquire about reinstating the company’s services,” is a situation contemplated by the 2016 Subscriber Agreement.  For these reasons, the court found it “foreseeable that Comcast would use Hearn’s information that it already had on file to reinstate services” and as such, Hearn’s FCRA claim is directly related to the 2016 Subscriber Agreement. Id. at *5. Given the narrow scope of the holding, the Eleventh Circuit remanded the case to the District Court so it could determine “the merits of the parties’ remaining arguments related to Comcast’s motion to compel arbitration.” Id.