Companies Illegally Collecting on Student Loans Discharged in Bankruptcy: CFPB

The Consumer Financial Protection Bureau yesterday released a bulletin warning companies to go back and look at money it collected from individuals with student loans to make sure they were not collecting money for loans that had been properly discharged during bankruptcy proceedings, and if it had collected on those loans, to return that money back.

A copy of the bulletin can be accessed by clicking here.

The CFPB said that it has found during its examinations that companies were treating the discharge of a loan as a “suggestion” and not a requirement. Some student loans are eligible to be discharged during standard bankruptcy proceedings, such as loans made to unaccredited schools, loans made in excess of the cost of attending the school, loans made to cover expenses for individuals studying for professional exams like the bar exam, and loans made to students who are attending school less than half-time.

Examiners found that companies did not have adequate policies and procedures in place to distinguish between the types of loans that could be discharged during standard bankruptcy and ones that required separate “undue hardship” proceedings. Servicers were relying on the loan holder to distinguish between the two and did not do anything to make sure the loan holders did that. Some borrowers paid thousands of dollars on debts that had been discharged as part of the bankruptcy process.

The CFPB said it would specifically be on the lookout for:

• Whether student loan servicers continue to collect on loans that are discharged by a bankruptcy discharge order;
• Whether servicers and loan holders have adequate policies and procedures to identify loans that are discharged by a bankruptcy discharge order and loans that require the borrower to go through an adversarial proceeding to demonstrate that they meet the undue hardship standard; and
• Whether servicers provide accurate information to borrowers about the status of their loans and the protections that bankruptcy offers.