Why It’s Foolish To Over-protect Debtors or Be A Cowboys Fan

September 5, 2012 at 7:03 am Leave a comment

When it comes to collecting student loans, speak softly and carry a very small stick-at least if you’re in the Second Circuit.  That’s the lesson I would draw from a decision released on August 30th. 

The case involves a woman who filed for Chapter 7 bankruptcy in 2001.  At the time, she made no effort to claim that her student loans constituted an undue hardship and, as of 2008, they remained unpaid with accrued interest.  The Department of Education, which financed the loan, was owed over $3,000.  Collecto, a debt collection company, sent a letter to the debtor informing her in big bold letters that the student loan debt was not dischargeable in bankruptcy and providing several payment options.

The debtor responded not by making a good-faith effort to pay off the long-overdue loan, but by commencing a class-action lawsuit under the Fair Debt Collection Practices Act alleging that the letter was false, misleading or deceptive.  A lower court dismissed the lawsuit.  It reasoned that, while discharge of the debt was technically an option for the debtor, the numerous obstacles made this a practical impossibility.  Remember, the debtor in this case would have to petition to get the previous bankruptcy proceedings reopened and then prove at a  hardship hearing that paying off a $3,300 debt constituted a hardship, which would preclude her from “a minimal standard of living.”

On appeal, the Second Circuit ruled that the case could go forward.  It reasoned that the operative inquiry in this case is whether a hypothetical least sophisticated consumer could reasonably interpret the Collection Letter’s statement that “Your account is NOT eligible for bankruptcy discharge,” as representing, incorrectly, that the debtor is completely foreclosed from seeking bankruptcy discharge of the debt in question.  The circuit concluded that the answer was yes and the case can go forward.

In other words, debt collection efforts should not be based on your member’s specific circumstances, but on what legal rights, no matter how remote, a hypothetical dullard could possibly be dissuaded from abandoning by reading a collection notice. 

This decision reflects an increasingly counterproductive trend towards “protecting” debtor’s to such an extent that well-meaning statutes are morphing from legitimate tools to guard against collection abuses (we really don’t need to return to the day of the 9 PM phone call threatening the debtor with debtor’s prison) to tripwires preventing creditors from engaging in legitimate collection activities against debtors who are legally obligated to try to repay their loans.  Decisions like these simply make loans more expensive for the vast majority of members who make an effort to repay their obligations.

CFPB extends mortgage disclosures Reg comment period

The Bureau charged by Congress with the responsibility of saving the American homeowner from itself by the end of this year has extended to November 6 from September 7 the comment period  for regulations which, among other things, would change the definition of finance charges and lower the threshold for what constitutes a high-cost mortgage.  Like almost everything else that the Bureau has proposed recently, these proposals are going to have a major impact on credit unions providing mortgages and I suggest that you all take advantage of this reprieve to tell the Bureau what you think. The Association has posted its own survey and feedback would be appreciated.

My first (maybe second) bet-the-mortgage-special

Tonight the cycle of life continues as professional football begins again.  This year we have the added bonus of having the defending Super Bowl champion Giants take on “America’s-most-overrated-team,” the  Dallas Cowboys in the season opener.  ( I dislike the Cowboys for two reasons:  first Jerry Jones and second the number of Cowboy fans who don’t live anywhere near Texas. They all say they grew up watching the Cowboys, but I am still trying to figure out how they did this before Direct TV.  I still can’t find many people who grew up  watching the  Seattle Seahawks).

Anyway, with the start of the professional football season, here are my eagerly awaited, suitable as collateral,  football predictions:

Tonight:  give the points and take the money – Giants, 31/ Cowboys, 24

Super Bowl pick: Giants, 38/ Houston Texans, 24




Entry filed under: Compliance, General, Legal Watch, Regulatory. Tags: , , , , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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