Dischargeable Versus Nondischargeable: Two Fishman Haygood Student Loan Cases Cited in CFPB Warning to Servicers

Earlier this year, the Consumer Financial Protection Bureau (CFPB) warned servicers that they must cease any unlawful conduct as it pertains to private student loans discharged in bankruptcy court. According to the CFPB’s Compliance Bulletin and Policy Guidance, examiners found that certain loan servicers illegally returned non-qualified education loans to collections despite their discharged status, a violation of the Consumer Financial Protection Act’s (CFPA) prohibition on unfair, deceptive, or abusive acts or practices. In addition to halting such tactics, the CFPB is directing servicers to return the illegally collected payments to the affected consumers. Click here to read the bulletin.

Dischargeable Versus Nondischargeable Debt

At the heart of the issue is the distinction between dischargeable and nondischargeable debt. According to Justia, most consumer debts, like credit card bills, may be discharged in bankruptcy court. Conversely, nondischargeable debts include those related to taxes, child support or alimony, and certain qualified student loans, among others.

What does that mean for most student loan borrowers hoping to strike their student loan debts? When a debtor files for bankruptcy, a judge issues a discharge order that releases him/her from personal liability for the debts unless they are exempted. In such cases, borrowers with certain qualified student loans that receive special treatment under section 523(a)(8) of the Bankruptcy Code must prove that the debt would cause undue hardship if it were not discharged.

A subset of private student loans, however, are discharged by standard bankruptcy discharge orders, just like other unsecured consumer debts; for example, loans made to attend schools that are not eligible to receive U.S. Federal student aid, otherwise known as “non-Title IV schools.” Under these circumstances, a bankruptcy discharge eliminates the student loan borrowers’ debt for those who attended non-Title IV accredited programs such as career training, bar study, study abroad, flight school, medical residency, and K-12 education.

CFPB Cites Two Fishman Haygood Cases in Warning

Fishman Haygood has been at the forefront of several class actions brought by borrowers against student loan servicer Navient Solutions. In fact, the CFPB’s bulletin cites two of the firm’s cases in its warning: Homaidan v. Sallie Mae, Inc. (In re Homaidan) and Crocker v. Navient Solutions, LLC (In re Crocker).

Remember that the CFPA prohibits unfair, deceptive, or abusive acts or practices. As stated in the firm’s class action lawsuits, Navient and its agents refused to recognize the discharges of these private student loans that were (a) to attend non-Title IV schools and programs or (b) made in excess of the cost of attendance, and then continued to collect on the loans even after borrowers obtained bankruptcy discharges. Navient even allegedly called borrowers’ relatives and employers, sometimes multiple times a day.

In Homaidan, the Bankruptcy Court for the Eastern District of New York entered a preliminary injunction enjoining Navient from taking any action to collect on thousands of private student loans made to borrowers who received bankruptcy discharges nationwide. In the Crocker matter, the firm secured approval of a Fifth Circuit-wide settlement of claims by bankrupt student loan borrowers against Navient. The firm continues to pursue nationwide class action claims for non-Title IV borrower in Woodard v. Navient Solutions, LLC (In re Woodard), filed in the Bankruptcy Court for the District of Nebraska.

The firm’s efforts have proved fruitful. Since the CFPB released its bulletin, Fishman Haygood has reached two nationwide settlements with Navient, in Homaidan and Woodard, which together will result in approximately $236 million in debt relief for private student loan borrowers, as well as $44 million in cash compensation. Read more about both settlements here.

Looking Ahead

Conduct like this not only hurts society’s most vulnerable people but also subverts how the bankruptcy process is supposed to work. The CFPB has vowed to use its “supervisory authority, enforcement authority, and referrals to State and other Federal authorities” to hold entities accountable.

For its part, Fishman Haygood continues to pursue cases on behalf of borrowers victimized by abusive loan collection tactics.

Attorneys Jason Burge, Kaja Elmer, and Lara Richards represent plaintiffs in class actions against Navient. Click here to learn more about Fishman Haygood’s class action and mass action litigation practice.