On March 16, 2023, the Consumer Financial Protection Bureau (CFPB) issued a bulletin cautioning loan servicers about their responsibility to stop any illegal activity related to private student loans that have been discharged by bankruptcy courts. CFPB examiners have apparently uncovered that certain loan servicers have been unlawfully sending discharged loans back to collections after bankruptcy courts had discharged them. The CFPB is directing these loan servicers to return any payments that were illegally collected from consumers and immediately stop using these illegal collection tactics. The bulletin also states that the CFPB will keep investigating the handling of student loans by servicers to check if any other companies are using such illegal practices.
In a statement, director of CFPB, Rohit Chopra, said, “When a court orders the discharge of a loan, lenders and servicers should not treat this as a suggestion. The CFPB has found that some servicers are ignoring bankruptcy court orders. The student loan servicing industry should ensure that their collection practices are compliant with the law.”
The bulletin explains the unfair practices that were observed by the CFPB examiners when investigating the way certain student loan servicers dealt with private loan accounts when consumers were given loan discharges through bankruptcy court orders. The bulletin also warns that the CFPB will keep examining the servicers’ handling of these loans and warns the servicing industry that the CFPB intends to take action against servicers who collect on debts that have been already discharged.
Although some student loans require a separate proceeding to be discharged in bankruptcy, according to the CFPB, some private student loans can be discharged in a standard bankruptcy proceeding, similar to most other unsecured consumer debts. For this subset of private student loans, a bankruptcy discharge order eliminates the consumer’s debt.
The CFPB provided some examples of student loans eligible for standard bankruptcy discharge, which include:
Loans made to attend schools that are not eligible to receive U.S. Federal student aid, such as unaccredited schools and foreign schools (“non-Title IV schools”);
Loans to students attending school less than half-time;
Loans made in amounts in excess of the cost of attendance, which are often disbursed directly to the borrower, instead of the school;
Loans made to cover fees and living expenses incurred while studying for the bar exam or other professional exams;
Loans made to cover fees, living expenses, and moving costs associated with medical or dental residency; and
Other loans made for non-qualified higher education expenses.
CFPB examiners identified student loan servicers who failed to distinguish between education loans that are discharged in a standard bankruptcy proceeding and loans that are not. As a result, servicers improperly sought to collect on loans that had already been discharged by bankruptcy courts. The CFPB found that, when faced with continued collection activities in violation of bankruptcy court orders, many borrowers continued to make payments, sometimes paying thousands of dollars on debts that they no longer owed.
The CFPB expects servicers to proactively identify student loans that are discharged via standard bankruptcy orders, permanently cease collections on such accounts, and refund any consumers who have been affected by unlawful collections.