Collection Law Overview For Student Loans and Accounts

Collection Law Overview For Student Loans and Accounts Receivables Presented By: James T. Hart, Esq.

WWR Today • 9 offices in 5 states • 90 attorneys • Roughly 800 legal assistants, collectors and support staff • Historically ranked as the nation’s largest debt collection law firm (by revenue/placement) • WWR attorneys certified as Creditors Rights Specialists by the American Board of Certification • More info? Go to www. weltman. com 2 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

National Collections Coverage WWR is properly licensed and bonded in all states and U. S. territories necessary to facilitate traditional upfront collections matters. 3 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Overview – ABCs of Collection Laws • • 4 | FDCPA UDAAP and the CFPB SCRA SOL Collection Costs/Fees Bankruptcy Litigation Considerations Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Fair Debt Collection Practices Act (FDCPA)

FDCPA In a Nutshell • Requires debt collectors to treat debtors fairly • Prohibits certain methods of debt collection • Addresses issue of proper and appropriate debt collection practices and techniques • Does not erase any legitimate consumer debt owed • Strict liability statute • Allegations of improper and inappropriate methods of collection may lead to filing of a lawsuit • Concerns consumer debts only – Personal, family and household debts – Would include Perkins Loans, Institutional loans, tuition, etc. 6 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Debt Collector • Who does the FDCPA apply to? – Any person or business who uses any instrumentality of interstate commerce or the mail with the principal purpose of collecting debt • One who regularly collects or attempts to collect debts owed, due, or asserted to be owed or due another – Includes Attorneys and Agencies • Debt collector does not include – Any officer or employee of creditor while, in name of creditor, collects debts for the creditor • Example — A college/university that undertakes collection efforts internally is not a debt collector. However, if the company hires another company to collect on its accounts, that company is a debt collector. 7 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Verification of Debts • If debtor requests verification of debt, collector must cease all collection activities until requested verification is mailed by debt collector to consumer 8 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Ceasing Communication • If debtor notifies in writing refusal to pay debt or wishes debt collector to cease further communication, debt collector shall not communicate further except: – To advise that although the debt collector's further efforts are being terminated, the debt still exists – To notify that debt collector or creditor may or will invoke specified remedies that are ordinarily invoked by them • If debtor notifies or debt collector is aware that debtor is represented by an attorney, direct contact is prohibited unless the attorney specifies otherwise 9 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Harassment or Abuse • Debt collector may not engage in any conduct meant to harass, oppress or abuse any person in connection with collection of debt – Examples: • Obscene/profane language • Causing telephone to ring or engaging any person in telephone conversation repeatedly or continuously with intent to annoy, abuse or harass any person • Use or threat of violence or other physical means to physically harm the person, their reputation or property 10 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

False, Deceptive & Misleading Representations • Examples – Making false statement as to character, amount, or legal status of debt – Stating or implying that debt collector is attorney if he/she is not, or that any communication is from an attorney if it is not – Threatening to take any action that cannot legally be taken or that is not actually intended – Falsely representing that document is legal process, if it is not – Stating or implying that actual legal process is not legal process requiring attention of debtor 11 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

UDAAP and the CFPB

UDAAP and the CFPB • It is unlawful to engage in any Unfair, Deceptive, or Abusive Act or Practices – FDCPA makes it illegal for debt collectors to engage in this activity – A lot of overlap with FDCPA • Consumer Financial Protection Bureau – Created by Dodd-Frank Act – Dodd-Frank Act introduced UDAAP and authorizes the CFBP to issue regulations designed to prevent/punish UDAAP violations – Applies to both original creditors and debt collectors 13 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Unfair Acts or Practices • Unfair Acts or Practices – Causes or likely to cause substantial injury to consumers – The injury is not reasonably avoidable by consumers; and – The injury is not outweighed by counterveiling benefits to consumer or to competition • “Substantial Injury” – Usually involves financial harm or emotional distress caused by unreasonable harassment • “Not Reasonably Avoidable” – Consumer cannot reasonably avoid injury if the act or practice interferes with the consumer’s ability to effectively make decisions or to protect himself/herself from the injury – Occur without consumer’s knowledge or consent 14 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Deceptive Acts or Practices • Deceptive Acts or Practices – The act/practice misleads or is likely to mislead consumer – The consumer’s interpretation of the act/practice is reasonable under the circumstances – The misleading act/practice is misleading • Can take the form of representation or omission • “Reasonable Under the Circumstances” – Would a significant minority be mislead? – Would another person in the consumer’s situation interpret the same way the consumer did? • “Material” – Information important to consumer when he/she makes a choice 15 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Abusive Acts or Practices • Abusive Acts or Practices – Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or – Take reasonable advantage of • Lack of understanding of material risks, costs or conditions • Inability to protect his/her interests; or • Reasonable reliance on a covered person to act in his/her interests 16 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

UDAAP and the CFPB • Examples of UDAAP violations – Falsely representing character, amount or legal status of debt – Threatening any action that is not intended or no authority to pursue – Collecting or assessing a debt or additional amounts (including fees) not expressly authorized by the agreement or permitted by law – Failing to post payments timely or properly or to credit the account – Disclosing consumer’s debt, without consent, to third parties, employer or co-workers 17 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Servicemembers’ Civil Relief Act (SCRA)

SCRA In a Nutshell • SCRA does not excuse the member from any legal obligation, it simply delays it • The protection is not automatic, member must apply for it • Protection will only apply if the obligation was entered into prior to active duty • Protection extends from first day of active duty through 30 -90 days after discharge • Interest rate may be reduced to flat rate of 6% upon notice • The burden is on creditor to seek relief by proving servicemember is not materially affected by service 19 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Who Does SCRA Apply To • All active members of the U. S. armed services • All officers of the Public Health Service detailed for duty with either the Army or Navy • Members in basic training or boot camp • Members of the Reserves and National Guard who are called to active duty for one of the following reasons: – – 20 | mobilized for federal service annual training military school National emergency for 30+ days Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Who Does the SCRA Not Apply To • Civilian employees • Employees of government contractors • Servicemembers who incurred the debt while on active duty • Persons secondarily liable – This is at the discretion of the courts • Business partners 21 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

More on the SCRA • Application – Servicemember must notify the college/university to invoke SCRA protection • Servicemember must assert/demonstrate that he/she is materially affected by his/her active duty status – Two-pronged test: • 1) The servicemember’s ability to protect his/her rights – Is he/she stationed in the United States or overseas? • 2) The servicemember’s ability to meet financial obligations – Is his/her salary while on active duty less than it would be for his/her normal job? • Servicemember may avail him/herself of the protection at any time after orders are received and up to 180 days after discharge 22 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Active Duty • Begins upon induction • Ends upon death or discharge • Includes period during which servicemember is absent from duty on account of sickness, wounds, leave, or other lawful cause • Constructed broadly by courts 23 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Default Judgment • A default judgment cannot be entered against a member without his/her knowledge • Department of Defense Manpower Data Center – www. dmdc. osd. mil/scra/owa/home – You will need borrower name and SSN • A creditor may only seek default judgment against a servicemember it knows is on active duty if the court has appointed an attorney to represent him/her • The servicemember may reopen the case to vacate the judgment if motion is made within 90 days of leaving active duty, has been prejudiced, and has a defense 24 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Penalties and Causes of Action • If found guilty of knowingly violating the SCRA, the violator could be fined up to $1, 000. 00 and/or imprisoned for up to 1 year • Attorney General may initiate civil action against creditor, seeking equitable and declaratory relief, monetary damages for the aggrieved party, and vindication of the public interest – Can also have a private cause of action and seek monetary damages, costs, attorneys fees and injunctive relief 25 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Statute of Limitations

Statute of Limitations - Loans • • 27 | When does SOL calculation begin – Date of last payment – Date of default – Date payment became due Federal Loans (i. e. Perkins) – No SOL considerations Other Loans (i. e. Institution Loans) – SOL to be determined by state law – Choice of law provision in the contract • Substantive vs Procedural Kentucky – 15 years for written contract if entered into before July 1, 2014, 10 years for contracts thereafter – Borrowing Statute Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Collection Costs/Fees

Collection Costs/Fees and Perkins • Perkins Loan – Federal regulation supersedes state laws restricting the assessment and collection of collection costs – Federal regulation allows reasonable collection costs • 30% for first placement • 40% for second placement and litigation placement – Despite federal regulation, state courts may still attempt to limit the amount of collection costs assessed to an account • May request proof of costs and reasonableness – in Kentucky see Spaulding University v. Melinda S. Bosco Bargas, 2006 Ky. App. Unpub. LEXIS 352 (December 1, 2006), unpublished 29 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Collection Costs/Fees • Can collection costs be assessed? – Depends on state law • Kentucky – Courts will require that any such costs be itemized, reasonable and reflective of actual collection costs expended. – Spaulding University v. Melinda S. Bosco Bargas, 2006 Ky. App. Unpub. LEXIS 352 (December 1, 2006), unpublished • Court of Appeals held that collection costs, which exceeded the actual principal, were not recoverable given that the University had failed to detail what the actual costs were and explain how such costs were “reasonable. ” 30 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Collection Costs/Fees – Recent Caselaw • Bradley v Franklin Collection Service, Inc. (2014) – Eleventh Circuit ruling – Medical debt where 30% collection cost/fee was added – Agreement said “I agree to pay all costs of collection. . . and reasonable collection agency fees” • Kojetin v CU Recovery, Inc. (2000) – 8 th Circuit ruling – Violation of FDCPA to add collection cost/fee based on percentage of the principal balance • Only entitled to actual cost of collection • Seeger v AFNI, Inc. (2008) – 7 th Circuit ruling – Percentage based fee can be appropriate if the parties agree to it in the contract 31 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Collection Costs/Fees – Recent Caselaw – Seeger continued • Contractual language stated the following – “You agree to reimburse us the fees of any collection agency, which may be based on a percentage at a maximum of 33% of the debt, and all costs and expenses, including reasonable attorneys’ fees, we incur in such collection efforts. ” – Bradley’s contract did not specify the collection agency fee to be charged • FDCPA violated when added 30% fee 32 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Bankruptcy and Education Related Debts

Chapter 7, 11 and 13 Bankruptcy • Chapter 7 Bankruptcy – When a debtor is seeking a discharge of his obligations to pay his debts – Does not discharge most taxes, mortgages, judgment liens, educational loans, and some other debts – Very common • Chapter 11 Bankruptcy – Used by large businesses to reorganize their debts and continue operating – Can be used by an individual in some circumstances 34 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Chapter 7, 11 and 13 Bankruptcy • Chapter 13 Bankruptcy – Most debt will be discharged upon completion of the payment plan – Many home mortgages must be paid in their normal monthly payments either outside or through the plan – For Universities/Colleges • Proof of Claim • Plan Review • Dischargeability of loans • Defense of Adversary • Co-debtor stay 35 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Bankruptcy • Automatic Stay Provision – Halts all action by school to collect debt – Starts when student/consumer filed bankruptcy • Discharge Injunction – Fresh start • Education Loans generally presumed non-dischargeable – Perkins Loan – Institutional and other education loans 36 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Bankruptcy • Adversary Proceeding – Proper procedure to determine dischargeability – Need to establish undue hardship • Proof of claim – File if there assets in Chapter 7 and monitor – File in Chapter 13 • Chapter 13 Plan – Repayment plan, generally over five years – Review and object if plan discharges education related debts • Espinosa Case (2010) – US Supreme Court 37 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367 (2010) • Object to objectionable plan provisions • Facts – Espinosa signed student loans, filed Chapter 13 bankruptcy a few years later – His plan only included the principal amount, and stated the interest would be discharged after the principal was repaid – His creditors were served with the plan, and with the deadlines for objecting – The student loan creditor filed a proof of claim, for the total amount including interest – **but the creditor did not file an objection to the plan – Espinosa’s plan was confirmed. Note: no adversary proceeding. No finding of undue hardship. Apparently routine confirmation 38 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367 (2010) • Facts (cont. ) – One month later, trustee notified creditor that he would pay according to the lower plan amount, rather than the claim amount – Creditor did not respond to the trustee – Debtor made all payments – Discharge • Procedural History – Creditor attempted collection, in accordance with traditional practice since there was no adversary proceeding, and no finding of undue hardship – Debtor filed motion to enforce the discharge order 39 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Bankruptcy – Tuition Receivable • Tuition Receivable – Presumed non-dischargeable? • Perkins Loan – Presumed non-dischargeable • Institutional Loan – Presumed non-dischargeable – Presumed non-dischargeability depends on certain factors • 11 U. S. C. 523(a)(8) – “A discharge does not discharge an individual debtor from any debt…unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for— • An educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or • An obligation to repay funds received as an educational benefit, scholarship or stipend; 40 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Are Tuition Receivables Dischargeable? • Fact specific. Examples: • Yes – Bankr. S. D. Indiana - In re Oliver (2013) – The failure to pay tuition did not result in a non-dischargeable debt. Not a “loan” – Applies the Chambers test • Yes – 7 th Circuit – In re Chambers (2003) – Did funds change hands; was there extension of credit In re Oliver, 499 B. R. 617, 623 (Bankr. S. D. Ind. 2013) In re Chambers, 348 F. 3 d 650 (7 th Cir. 2003) 41 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Are Tuition Receivables Dischargeable? • Yes - 2 nd Circuit - In re Renshaw (2000) – The absence of an agreement in compliance with the Grand Union loan standard precludes this extension from qualifying as a non-dischargeable education loan – The “Reservation Agreement” did not comply with the Grand Union standard because it – Did not agree to let the student attend without paying – Did not obligate payment later • No – 6 th Circuit - In re Merchant (1992) – An agreement that took the form of a promissory note in the amount of indebtedness to the university was a not dischargeable education loan – The promissory note met the Grand Union standard 42 In re Grand Union Co. , 219 F. 3 d 353, 356 (2 d Cir. 1914) In re Renshaw, 222 F. 3 d 82 (2 d Cir. 2000) In re Merchant, 958 F. 2 d 738 (6 th Cir. 1992) | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Bankruptcy – Transcript and Registration • Withholding Transcripts – Likely viewed as violation of automatic stay provision – Serves no purpose other than to compel repayment – Ok to withhold after bankruptcy, as long as not discharged • Case Examples of Stay Violation: – In re Trailer (2013) – Withholding an academic transcript from a bankrupt student is a willful violation of the Automatic Stay Provision – In re Mu’min (2007) – Institution violated the Automatic Stay provision by withholding the student’s academic transcript – In re Gustafson (1991) – Withholding of the transcript could serve no purpose other than to compel the repayment of the debt or reaffirmation of the obligation n re Trailer, 12 -31668, 2013 WL 1136912 (Bankr. M. D. Ala. 2013) In re Mu'min, 374 B. R. 149, 169 (Bankr. E. D. Pa. 2007) In re Gustafson, 111 B. R. 282 (Bankr. App. 9 th Cir. 1990) rev’d, 934 F. 2 d 216 (9 th Cir. 1991) 43 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Transcripts and the Automatic Stay • Examples of cases finding that withholding transcripts does not violate the Automatic Stay Provision – In re Najafi (1993) • Withholding the transcript does not violate the Automatic Stay provision and is a reiteration of the institution's collection policy • Minority view; questionable validity today • Other implications – In re Howren, 10 B. R. 303 (Bankr. D. Kan 1980) – Withholding transcripts by gov’t violates anti-discriminatory provision • The detriment to the livelihood of the debtor that withholding the transcript causes violates the Fresh Start Provision – Withholding transcripts does not violate that provision. See Johnson v. Edinboro State College, 728 F. 2 d 163 (3 rd Cir. 1984) – Can hold transcript after discharge, where the receivable is nondischargeable 44 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Transcripts • Transcripts (cont. ) – Can an institution withhold a transcript from a bankrupt individual? – Depends – Majority view: holding transcript is violation of automatic stay before discharge. 45 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Registration • • • Same issues with transcripts – Refusal to allow registration likely viewed as violation of automatic stay If bankruptcy is pending, cannot force student to pay past-due debt before allowing them to register However, can make student pay in full for the semester he/she is registering Handsome v. Rutgers (1978) – The court held that by withholding the debtor's transcripts and refusing to permit her to register, this state university had violated the Bankruptcy Code In re Parker (2005) – Not allowing student to register due to pre-petition debt violated the automatic stay, and the discharge injunction Handsome v. Rutgers U. , State U. of New Jersey, 445 F. Supp. 1362 (D. N. J. 1978) Matter of Health, 3 B. R. 351 (Bankr. N. D. Ill. 1980) The In re Parker, 334 B. R. 529, 536 (Bankr. D. Mass. 2005) 46 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Litigation Considerations

Why Litigate? • Litigation can be a highly effective collection tool • Litigation is often overlooked or used as a last resort • In some instances, litigation is required in order to continue collections • To avoid the statute of limitation from preventing further collections 48 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Where To Sue • FDCPA requires that litigation to collect a debt is filed within the jurisdiction where: – The school is located and the contract is executed or – Where the student resides • Considerations – Does the student live where the school is located – Cost to transfer/domesticate a judgment – The student attended college/university online • The general rule for collections is to sue where the debtor resides 49 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Documentation Needed To Litigate • Suit based on contract – Promissory Note • Federal Perkins Loan • Institutional Loan – Still may proceed if the Promissory Note is lost, destroyed, or unsigned • Will need to establish that student received the funds and benefit of the loan • May modify SOL • Tuition – Contract? – Itemized statement 50 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Documentation Needed to Litigate • Online/Distance Learning – E-sign – Screenshots • Collection Costs and Attorney Fees – Required for Federal Perkins Loan by federal regulation – Is this specifically stated/defined in contract/promissory note for non-Perkins litigation – Are these allowable in the state where litigation is filed? 51 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Judgment • It is important to obtain a copy of the judgment entry – To verify the balance of the judgment – To maintain a record in the event that the judgment account is placed with another law firm to execute on the judgment • Exemplified Copy/Certificate of Judgment – This will be needed to transfer and domesticate the judgment if judgment was taken in a state other than where the student resides or the student moves 52 | Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Post Judgment • Judgment execution – Type of executions determined by state law • Kentucky – – 53 | Wage garnishment – 25% of disposable income Bank attachment Judgment lien CR 69. 03 Debtor Exam Collection Laws for Student Loans & Accounts Receivables WELTMAN, WEINBERG & REIS CO. , LPA

Thank You James T. Hart Attorney, Cincinnati Consumer Collections | Commercial Collections | Complex/Special Collections Group | Education Loan Recovery Group | Subrogation Practice Group | Healthcare Collections Group | 54 | Collection Laws for Student Loans & Accounts Receivables email jhart@weltman. com phone 513. 723. 2209 www. weltman. com WELTMAN, WEINBERG & REIS CO. , LPA