I am in default on my student loan payment. The debt has been assigned to a debt collector. I recently received a call from the collector. He told me that I cannot wipe out my student loan in bankruptcy. Is this true? If not, is he violating the law by telling me this?
Most likely. A debt collector that communicates to you, either orally or in writing, that your student loan debt is not dischargeable in bankruptcy runs the risk of violating the federal Fair Debt Collection Practices Act (FDCPA).
Student loans are not automatically discharged (wiped out) in bankruptcy. However, you can bring an action within your bankruptcy case asking the judge to discharge student loans. To be successful, you must prove that to pay them would cause you undue discharge.
The undue hardship standard is not an easy one to overcome. But it’s not impossible. Depending on your circumstances and how your bankruptcy court generally treats student loans, you may be able to get rid of them.
To learn the ins and outs of discharging student loans in bankruptcy, visit our Student Loans in Bankruptcy topic area.
The goal of the FDCPA is to protect consumers from unfair, deceptive, and abusive practices by debt collectors. The FDCPA specifically prohibits debt collectors from making false, deceptive, or misleading statements while trying to collect debts. (To learn more, visit our Illegal Debt Collection Practices Under the FDCPA topic area.)
Is telling a consumer that his or her student loan cannot be discharged in bankruptcy false or deceptive? The Second Circuit Court of Appeals thought so. In 2012, it ruled that a debt collector’s written statement, declaring that the debtor’s student loan was “ineligible for bankruptcy discharge,” violated the FDCPA. Easterling v. Collecto, Inc. 2012 WL 3734389 (2d Cir. Aug. 30, 2012).
The court reasoned that even though proving undue hardship might be difficult, to tell a consumer that it would be impossible was “false on its face.” The court also pointed out that a consumer’s circumstances could change – so that even if she currently couldn’t meet the standard, she might be able to in the future.
The court also found the statement to be misleading. The FDCPA requires courts to view debt collector statements from the perspective of the “least sophisticated” consumer. This means that the court should not consider the individual consumer’s education level or knowledge of bankruptcy, but instead think about whether a particular statement would fool an unsophisticated consumer. In this case, the court found that the least sophisticated consumer, upon reading the collection letter, might be misled into believing her student loan could never be discharged. And, the court noted, this could be harmful – a consumer might decide not to seek legal advice as to whether or not she could wipe out her loans in bankruptcy.
Do all courts feel the same way? You would think so – it seems fairly obvious that telling someone that his or her debt is not eligible for bankruptcy discharge, when it might be, is deceptive. But in the Easterling case, the trial court held otherwise (before being overruled by the court of appeals). So it’s possible another trial court might find such a statement is not deceptive. Of course, the trial courts in the Second Circuit (Connecticut, New York, and Vermont) are bound by the Easterling decision.
If you are struggling with student loan payments, visit our Student Loan Debt topic area for information about repayment plans, how to get out of default, and more.