The U.S. Court of Appeals for the Second Circuit recently held that a debt collection letter, which stated that a debtor's student loans were "not eligible for bankruptcy discharge" following the debtor's bankruptcy in which she listed the student loans as non-dischargeable, still violated the FDCPA's prohibition against "false, deceptive, or misleading" debt collection practices, as the debtor could reasonably interpret the letter to mean that discharge of her student loan debt was completely unavailable to her even though it was still possible for the debtor to re-open her bankruptcy case and pursue a discharge for "undue hardship."
A copy of the opinion is available by clicking here.
Plaintiff-debtor ("Debtor") filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code. In her bankruptcy petition, Debtor listed her student loan debt as "not dischargeable" and did not seek to discharge her student loans during the course of her bankruptcy proceeding. Accordingly, Debtor's student loan debt was not discharged and remained due and owing.
A number of years following Debtor's bankruptcy proceeding, Defendant debt collector ("Debt Collector"), in the business of collecting overdue student loans on behalf of the U.S. Department of Education, mailed a letter to Debtor stating in part that Debtor's account "is NOT eligible for bankruptcy discharge and must be resolved."
Debtor subsequently commenced a class action law suit on behalf of herself and almost 200 other people who had received letters containing the same language. Debtor claimed that the statement in the collection letter that the student loan debt was "ineligible" for bankruptcy discharge was a "false, misleading, or deceptive" debt collection practice in violation of the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. ("FDCPA").
The district court granted Debt Collector's motion for summary judgment and dismissed Debtor's complaint. The district court concluded that Debt Collector's letter was "not inaccurate," because Debtor had not taken any of the steps necessary for the bankruptcy court to address a potential discharge of her student debt, including bringing an adversary proceeding and making a showing that payment of the debt would cause Debtor an "undue hardship." The lower court stated, "until she can make [such] a showing, . . . the debt is, in fact, not dischargeable in bankruptcy." Debtor appealed.
The Second Circuit reversed and remanded, ruling that as long as Debtor could potentially re-open the bankruptcy case and satisfy the "undue hardship" test, Debt Collector's letter was false on its face and thus violated the FDCPA.
As you may recall, the FDCPA provides that a "debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt." 15 U.S.C. § 1692e. In addition, the Bankruptcy Code provides that debt consisting of government-backed student loans is not dischargeable unless repayment of the debt "would impose an undue hardship on the debtor." 11 U.S.C. § 523(a)(8).
Noting among other things that Debtor would have to re-open her bankruptcy case to file an adversary proceeding, and then would bear the burden of demonstrating that repayment of her student loans posed an "undue hardship" to her, the Second Circuit reasoned that, while such obstacles to discharge made student loan discharge more difficult, they did not render the student loan debt completely "ineligible" for bankruptcy discharge, as stated in the collection letter. See Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987)(setting forth the test for showing "undue hardship"); 11 U.S.C. § 350(b)(allowing a bankruptcy case to be reopened "to accord relief to the debtor"). The Court thus concluded that Debt Collector's letter mischaracterized the dischargeability of the student loan debt.
Further, in applying the "least sophisticated consumer" standard used to determine whether a collection letter is "false, misleading or deceptive" under the FDCPA, the Second Circuit ruled that Debt Collector's inaccurate representation of the dischargeability of the debt could lead Debtor to reasonably, but incorrectly, conclude that a bankruptcy discharge of her student loan debt was completely unavailable to her.
The Court agreed with Debtor that, because she could still pursue a discharge of her student loan debt by taking certain steps to re-open the case and prove undue hardship, it was error for the district court to conclude that Debt Collector's letter did not violate the FDCPA.
In so ruling, the Second Circuit noted that the district court had failed to apply the objective "least sophisticated consumer" test, and placed too much weight on the circumstances surrounding Debtor herself. Accordingly, the Court concluded that Debt Collector's letter was "false" and "fundamentally misleading" and that the letter's "capacity to discourage debtors from fully availing themselves of their legal rights renders its misrepresentation exactly the kind of 'abusive debt collection practice' that the FDCPA was designed to target."
The Court remanded for further proceedings.
Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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Email: RWutscher@mtwllp.com
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