Student Loan ARM Firm Loses Debt Collection Letter Appeal

A federal appeals court Thursday ruled against a student loan debt collector in an FDCPA case over the wording in a collection letter cautioning consumers that student loans are not eligible for discharge in bankruptcy proceedings. A lower court had ruled in the collection agency’s favor, in part, because the consumer specifically noted that the debt was not dischargeable in a previous bankruptcy filing.

The case, Easterling v. Collecto, Inc., was filed in 2008 as a class action after the consumer received a letter from the collection agency.

Collecto is a vendor on the Department of Education’s student loan debt collection contract. On September 24, 2008, the company sent Easterling a collection letter that contained the following language:

*****ACCOUNT INELIGIBLE FOR BANKRUPTCY DISCHARGE*****

Your account is NOT eligible for bankruptcy discharge and must be resolved.

Easterling filed suit shortly thereafter on behalf of herself and 181 other New York residents that received letters with the same language. She argued that the language was a violation of the Fair Debt Collection Practices Act (FDCPA) because the language was “false, misleading, or deceptive,” since there does exist a mechanism for student debtors to discharge their loans in bankruptcy by showing undue hardship.

Germane to the case, Easterling had filed for bankruptcy protection in 2001. At that time, her student loan balance amounted to $2,469. In her bankruptcy petition, Easterling classified her student loan debt as “not dischargeable,” and she did not subsequently seek to discharge her student loan debt during the course of her bankruptcy proceeding.

Collecto was assigned the debt (which had increased to $3,300) some time later, triggering the 2008 collection letter.

The U.S. District Court for the Western District of New York granted in July 2011 Collecto’s motion to for summary judgment and dismissed the case. The court said that while it is technically possible to discharge student loan debt in bankruptcy, the collection letter was “not inaccurate” because “[i]n her original bankruptcy case filed with the advice of counsel in 2001, [Easterling] never even attempted to bring an adversary proceeding to show that repaying her student loan would cause her undue hardship” and because she “has neither reopened her 2001 bankruptcy case nor filed a new bankruptcy case to seek a discharge of her student loan.”

The Second Circuit Court of Appeals Thursday disagreed with the lower court’s finding, writing that “although Easterling may face significant hurdles to discharging her student loans in bankruptcy, we hold that the least sophisticated consumer would interpret Collecto’s letter as representing, incorrectly, that bankruptcy discharge of her loans was wholly unavailable to her.”

The three-judge panel also noted that the district court’s focus on whether Easterling has received, or is likely to receive in the future, a discharge of her student loan debt is misplaced.

The ruling was overturned and the case remanded to the lower court for further proceedings.