1. BANKRUPTCY & LEGAL HOT TOPICS
CAASLAR’s Annual Conference 2016
Chad V. Echols Outside General Counsel Williams & Fudge, Inc. & Owner of The Echols Firm, LLC

2. Disclaimer
This presentation should be construed as an overview of the issues discussed. The presentation is not legal advice to anyone attending this presentation, or reading the accompanying handout. Specific legal questions regarding these concepts and their application to any institution of higher education or other presentation participant should be directed to the institution’s or other participant’s legal counsel.

3. Partnership
Now more than ever, the communication between a creditor and its partnering agencies should be clear and candid. Recent positions advanced by the Consumer Financial Protection Bureau highlight this point.
If you have information about a student that will be helpful to an agency, please identify the information at placement (i.e. bankruptcy, issues with prior agency, and/or issues with the school).

4. Don’t Buy Stuff You Can’t Afford

5. Bankruptcy Presentation
What do you know about bankruptcy today?
What are the basics regarding bankruptcy?
What needs to be done to protect my institution’s debt from discharge?
What are the current issues and cases relating to bankruptcy and student loans?
Title IV refunds, the resulting AR, and how can this type of debt be addressed?
What is the statute of limitations (“SOL”)?
What are the trends related to the SOL and how might that impact my institution?

6. Bankruptcy
The most recent significant legislation in this area is the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” (BAPCA – S. 256)
Passed – April 14, 2005
Signed – April 20, 2005

7. Bankruptcy Basics
Article I, Section 8 of the U.S. Constitution grants Congress the power to create “uniform Laws on the subject of Bankruptcies throughout the United States.”
The US Constitution completely preempts states from handling bankruptcy issues and therefore all bankruptcy laws are federal and cases are handled by the federal courts.
The bankruptcy code is found at 11 U.S.C. § 101, et seq.
Fundamentally bankruptcy is to give debtors a “fresh start” and to place creditors in an appropriate priority for re-payment.

8. Bankruptcy Statistics
There were 936,795 nonbusiness bankruptcy filings from Jan – Dec file:///D:/ProfileData/chad.echols/Downloads/1214_f2.pdf
People with some college but no degree account for 28.9% of filings, yet only 19% of the population.
Oct prior to new law – 619,322 cases filed, Nov – 13,758 cases filed; and monthly filing have risen each month since – CNN Money.com, June 12, 2006

9. Bankruptcy Terms
Petition – A bankruptcy begins when a voluntary or involuntary petition for relief is filed in bankruptcy court.
Automatic stay – 11 U.S.C. § 362 – prohibits “all entities” from “any act to collect” a debt during the bankruptcy.
Trustee – Appointed by the court as the fiduciary of the consumer. They either convert assets to cash and distribute the money, or manage the consumer’s repayment plan under Chapter 13.

10. VCIS
The Voice Case Information System is a FREE way to find out the status of a students bankruptcy. You simply need to locate the appropriate Bankruptcy Court to obtain the phone number.

11. VCIS
There is now a national number with certain codes for different courts listed at the following website: (866)

12. Bankruptcy Chapters Chapter 7 – Liquidation
Chapter 11 – Business Reorganization
Chapter 12 – Farm Protection
Chapter 13 – Individual Reorganization

13. Chapter 7 - Liquidation Most common
Liquidation – there are asset and no asset cases
Individual may only file once every 8 years. This is an increase from every 6 years and became effective Oct. 17, 2005.
Priority of payment is established in the code and basically reads that expenses are paid, then secured creditors and finally unsecured creditors.
Roughly 3-6 months to receive a discharge

14. Chapter 13 – Wage Earner
Debtor, with the Trustee, sets up a re-payment plan through Bankruptcy Court.
Debtor has some regular income.
There are limits on the amounts of secured and unsecured debt a consumer can have to file under Ch. 13.
The plan must provide for all future earnings to be subject to the supervision and control of the Trustee and must provide for full payment of all secured claims.
Nondischargeable student debt remaining unpaid following the discharge survives the bankruptcy and is collectible with allowable interest. See Leeper v. Pa. Higher Educ. Assistance, 49 F.3d 98 (3rd Cir. 1995), Educational Credit Management Corp. v. Kielisch, 252 BR 338 (E.D. Va. 2000).
Roughly 3-5 years to receive a discharge.

15. Dismissal
Trustee or a creditor may petition the Bankruptcy Court for a dismissal.
Being dismissed means the debtor does not qualify, under the code, as bankrupt.
Bankruptcy Court may also dismiss a debtor for “substantial abuse” of the Bankruptcy Code.
The KEY – Dismissal ≠ Discharge

16. Discharge
Generally a debtor receives a discharge from Bankruptcy Court when they have met the requirements of the Code under the Chapter in which their bankruptcy was governed. All dischargeable debts are effectively discharged and are no longer owed.
IMPORTANT – Whether or not a debt is discharged is governed by the Bankruptcy Code and by case law, but not by the debtor or the creditor.
Have the student look at their Discharge Order with you. Show them that the court has not discharged the student debt owed to your institution.

17. Discharge Order

18. Discharge Order

19. Exceptions to Discharge
11 U.S.C. § 523(a)(8).
This definition has changed effective Oct. 17, This change was an important factor that leading to increased private lending in the student loan market. The increase in private lending may lead to a greater interest by Congress in this provision. The current climate does not favor a legislative adjustment.

20. Prior 11 U.S.C. § 523(a)(8)
“(a) A discharge under … this title does not discharge an individual debtor from any debt—
(8) 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 for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents”

21. Current 11 U.S.C. § 523(a)(8)
“(a) A discharge under … this title does not discharge an individual debtor from any debt—
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for
(A)(i) 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 a nonprofit institution; or

22. 11 U.S.C. § 523(a)(8) – cont.
(A)(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.”
The difference is the addition of the term “qualified education loan” as defined under federal law and whether this definition will clear some of the current questions in our industry about what type of debt is discharged.

23. Internal Revenue Code § 221(d)(2)
“qualified higher education expense” is defined to mean –
“the cost of attendance (as defined in section 472 of the Higher Education Act of 1965 as in effect on the day before the date of enactment of this Act) as an eligible educational institution…”

24. Section 472 of the HEA 20 U.S.C. 1087ll
Cost of Attendance =
Tuition/Fees normally assessed a student including materials and equipment for students in the same course of study.
Books/Supplies/Misc. Personal Expenses
Room & Board
The statute and applicable case law should be reviewed for the context of each item listed above.
Clearly this definition is broader than the pre-2005 interpretation.

25. The Precedent re: 523(a)(8)
Federal Debt vs. Institutional Debt
What does the case law say about institutional debt?:
In re Chambers, 348 F.3d 650 (7th Cir. 2003)
In re Mehta, 310 F.3d 308 (3rd Cir. 2002)
In re Renshaw, 222 F.3d 82 (2nd Cir. 2000)
Basically – Funds need to have changed hands or there should be a signed agreement.
The states in the 2nd, 3rd, and 7th Circuits are: IL, IN, WI, DE, NJ, PA, CT, NY, VT

26. The Chambers case
Although the term “loan” can be construed broadly under various dictionary definitions, we look to the common law definition of “loan” as articulated in In re Grand Union Co., 219 F. 353, 356 (2d Cir.1914), and as paraphrased in Renshaw, 222 F.3d at 88. Under this interpretation, nonpayment of tuition qualifies as a loan “in two classes of cases”: “ ‘where funds have changed hands,’ or where ‘there is an agreement ... whereby the college extends credit.’ ” Mehta, 310 F.3d at 314 (quoting Renshaw, 222 F.3d at 90). The agreement to transfer educational services in return for later payment “must be reached prior to or contemporaneous with the transfer” of those educational services. Renshaw, 222 F.3d at 88. This existence of a separate agreement acknowledging the transfer and delaying the obligation for repayment distinguishes a loan from a mere unpaid debt. In re Chambers, 348 F.3d 650, 657 (7th Cir. 2003)

27. New Case from Aug. 13, 2015
Having established the existence of a loan for educational purposes, D'Youville College readily fulfills the statute's remaining but otherwise inclusive standard for non- dischargeability, namely that the loan be “made under any program funded in whole or in part by a ... nonprofit institution.” 11 U.S.C. § 523(a)(8)(A)(i)(emphasis added). For the reasons stated herein, the debtor's motion for summary judgment is denied, but the cross motion by D'Youville College for summary judgment is granted. Accordingly, the court grants judgment declaring that the obligation of Andrea G.A. Hardy to D'Youville College is non-dischargeable.
In re Hardy, 535 B.R. 528 (Bankr. W.D.N.Y. 2015)

28. The only way out!!
When you are holding a non-dischargeable student loan, the only way for the debtor to have that debt discharged is to petition the court for an adversary hearing and then to receive from a judge a finding of “undue hardship.” This all just about changed last year – see Traversa v. Educational Credit Mgt. Corp., 444 Fed.Appx. 472 (2nd Cir. 2011), cert. denied.
There is the possibility for a partial discharge based on case law, but this is the minority rule and appears to be a judicially created remedy.

29. Undue Hardship
The Majority Test – See Brunner v. New York State Higher Educ. Services Corp., 831 F.2d 395 (2d Cir. 1987).
Three elements must be proven by a preponderance of the evidence.
Based on current income and expenses the debtor cannot maintain a minimal standard of living.
This situation is likely to persist for the duration of the repayment period.
A good faith effort has been made to repay the loans.
Often you will see an intervening circumstance that has dramatically affected the debtor’s earning potential.

30. Undue Hardship
As case law trends in favor of the consumer, Colleges and Universities should watch the development of the cases addressing the Brunner test. I believe the trend will erode the standard that has served as the majority view for years, and student loans will become increasingly easier to discharge through a bankruptcy filing.

31. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
Passed by Congress on April 14, 2005 and signed by President Bush on April 20, 2005.
Became effective on October 17, 2005.
Overhauls many portions of the current bankruptcy code and provides some additional protection for creditors.
The first major revision to the Bankruptcy Code since 1987.

32. BAPCA Highlights
Creditor may challenge a debtor’s eligibility under Chapter 7.
A dismissal may result from debtor abuse.
Debtors under Ch. 7 must meet the median income test and the means test. Failure to do so creates a presumption of abuse.
Credit counseling is mandated.
Broader exemptions for retirement savings.
Years increased from 6 to 8 for following a Ch. 7 with another Ch. 7.

33. Transcripts
Does bankruptcy affect our policy of placing holds on transcripts?
This is specific to the jurisdiction of the bankruptcy and the case law should be reviewed to make an informed decision.

34. Transcript Cases In re Hernandez, 2005 WL 1000059 (Bankr.S.D.Tex.)
In re Mu’min, 374 B.R. 149 (E.D. Pa ).
These cases provides a clear explanation of the issue and support the majority rule.

35. What is next?

36. The times are a changin’… Trends Impacting the Collection of Student Debt

37. This approach is not reasonable.

38. Partnership
It is important for vendors to understand that a sales team cannot – by themselves – drive discussions with clients about a vendor’s services. It is critical for vendors to work together and make sure creditors have accurate information about the current status of the collection industry. This will foster better compliance in the collection of higher education debt because schools are often not as current on issues as – for instance – creditors from the financial sector.

39. The Wall Street Journal May 8, 2015

40. The Student Loan Lawyer

41. Hot Topics Current legal status of the industry; Assessing fees; TCPA;
FDCPA;
CFPB; and
State law changes

42. Bradley v. Franklin Collection Service, Inc.
The opinion in the Bradley case was issued by the 11th Circuit Court of Appeals. The only federal court higher than a federal appellate court is the U.S. Supreme Court.

43. Bradley v. Franklin Collection Service, Inc.
The core of the Bradley opinion is about contract language.
The case involved the collection of medical accounts, but the contract issues in the case apply to tuition, institutional loans, and other receivables owed to colleges and universities.
It would be a mistake to assert that Bradley is not applicable to higher education because the debt originated as a medical account. The medical/education issue is a distinction without a difference. The issue is contract law.

44. (terms highlighted for emphasis)
Contract Language
The contract language discussed in the Bradley case was as follows:
“costs of collection” (ruled problematic);
“reasonable collection agency fees” (not specifically addressed because the applicable plaintiff did not appeal the issue); and
“[y]ou 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 attorney’s fees, we incur in such collection efforts.” (court suggests this may be appropriate)
(terms highlighted for emphasis)

45. Fees vs. Costs
The common use of the term “collection costs” along with the term “attorney’s fees” creates a contractual distinction on the face of the document.
If the intent in both circumstances is to assess a “fee,” then the term should be used in both places.

46. Contract Issues
Schools have contractual relationships with students whereby the institution agrees to provide services and the student agrees to pay for those services. The open question is what are the terms of that contractual relationship?
Agencies have contractual relationships with colleges and universities to collect outstanding receivables and student loans for a fee.
Any amount the student owes the college or university is wholly determined by state and federal law OR the contract terms between the student and the school.
The principal, interest, late fees, and/or collection fees are determined and assessed by the school. The consumer does not owe money to a collection agency. The consumer owes money to a creditor and the creditor then owes a fee to the agency for the collection of any or all of the debt.

47. Debt Collection Litigation & CFPB Complaint Statistics
March 2016
“For March 2016, 36% of all consumer litigation plaintiffs had sued at least once before under consumer litigation statutes.
About 1012 different companies were sued, down 4% over the 1053 last month. And 760 different debt collectors were complained about to the CFPB, about 1% higher than last month’s 752 (but remember the caveat about more data trickling in).
The percentage of suits filed as putative class actions were mixed, with 18.6% for FDCPA, 13% for TCPA and 8.4% for FCRA”
Comparisons:
Current Period:
Previous Period:
Previous Year Comp:
Mar 01, 2016 Mar 31, 2016
Feb 01, 2016 Feb 29, 2016
Mar 01, 2015 Mar 31, 2015
CFPB Complaints 
3229
3241
-0.4%
3910
-17.4%
FDCPA lawsuits 
1001
810
23.6%
960
4.3%
FCRA lawsuits 
334
277
20.6%
257
30.0%
TCPA lawsuits 
462
397
16.4%
250
84.8%
YTD CFPB Complaints 
9436
10628
-11.2%
YTD FDCPA lawsuits 
2588
2802
-7.6%
YTD FCRA lawsuits 
886
713
24.3%
YTD TCPA lawsuits 
1213
720
68.5%
Source: webrecon.com.

48. TCPA The Telephone Consumer Protection Act, 47 U.S.C. § 227, et seq.;
1991 – think about cell phones in 1991;
First & third party liability; and
Significant penalties.

49. TCPA Per violation liability; No class cap; Defense strategies:
Land-line;
Definition of dialer;
Legislative fix;
Scrubbing;
Etc..
Insurance issues;
CONSENT – your help!!
Proposed FCC Regs

50. TCPA
Both creditors (schools) and collection agencies can be liable under the TCPA. Also, per the FCC, creditors can be liable for telephone contact of their collection agencies. It is important to be aware of a creditors telephone communication practices and the actions of its agency partners as it relates to the use of dialing technology.

51. TCPA
“AUTHORIZATION: - I authorize the School, the Department, and their respective agents and contractors to contact me regarding my loan request or my loan(s), including repayment of my loan(s), at the current or any future number that I provide for my cellular phone or other wireless device using automated telephone dialing equipment or artificial or pre-recorded voice or text messages.”
The above-stated language was taken directly from the Perkins loan master promissory note. The language is an example (from DOE) of language implemented because of the TCPA. The language is easily adaptable for other creditors.

52. FCRA & TCPA Litigation Statistics

53. FCC Rulemaking on TCPA – Released July 10, 2015

54. What do the new FCC rules mean?

55. FDCPA Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq.
Letters; ;
Call volume;
Voic ; and
Any other theory consumer attorneys can come up with!

56. FDCPA
There are many current theories the consumer bar is advancing against the collection industry that impact how agencies can collect for their college and university clients.
Douglass/Convergent;
McMahon/Delgado; etc…

57. FDCPA

58. FDCPA
Round peg in a square hole – how does legislation from address the issues of technology in 2015?
Cell phones;
Smart phones; ;
Apps;
Voice mail;
Texting;
Etc….

59. CFPB The Consumer Financial Protection Bureau;
The Dodd-Frank Wall Street Reform and Consumer Protection Act of established the CFPB; and
The CFPB has some very unique structural and funding aspects that are concerning to the collection industry and others.

60. CFPB
Historically the FTC had oversight over the FDCPA, but did not have the authority to promulgate rules and regulations interpreting and implementing the FDCPA. The new CFPB has rule making authority and will therefore have a major impact on the FDCPA going forward;
Complaint portals;
CFPB enforcement activity (CIDs, etc…)

61. CFPB enforcement activity from their annual report released in March, 2015

62. Other state specific issues
North Carolina, for example, has a bi-furcated collection statutory structure. One portion of North Carolina’s law is specifically drafted to govern the actions of entities defined as “collection agencies”, but the other portion of the statute (which was recently changed in ways that should be important to creditors) contains very specific collection prohibitions which apply to creditors (schools would, based upon my reading of the statute, be governed by this statute). See N.C. Gen. Stat , et seq.

63. N.C. Dept. of Insurance
As an example of recent regulatory positions impacting the industry you can easily locate the N.C. Dept. of Insurance June 12, 2014 memorandum to all licensed collection agencies regarding convenience fees.
This is also a quality example of the collection industry being singled out and excluded from a common business practice.

64. Other state specific issues
Statute of limitations issues will continue to complicate portfolio recovery and impact the collection of defaulted debt.

65. Statute of Limitations
The national effort by state regulators, federal regulators, and the consumer bar to alter the traditional meaning of the statute of limitations is one of the more striking changes that is happening in the collection industry.
This change is not – in general terms – being driven by higher education debt, but higher education accounts will be dramatically impacted.

66. “Operation Collection Protection”
In late 2015 the Federal Trade Commission began to work in concert with the CFPB. The effort includes the two mentioned federal agencies, the Dept. of Justice, 47 state attorneys general, 17 state regulatory agencies, one Canadian provincial regulator, and a number of local authorities.

67. The lost provision of the FDCPA
(e) Purposes
It is the purpose of this subchapter to eliminate abusive debt collection practices by debt collectors, to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses.
15 U.S.C.A. § 1692

68. Area of progress – CFPB Bulletin
CFPB Compliance Bulletin
November 23, 2015
Consumer Authorizations for Preauthorized Electronic Fund Transfers
This is a pro-consumer positive development regarding how creditors/agencies can work with consumers to more efficiently and compliantly obtain payment.

69. Questions

70. Thank you for attending today’s presentation
Thank you very much for your attention today. I hope a better understanding of the topics discussed will assist each institution in improving their overall approach to collections. Please feel free to contact me with any additional questions or concerns.
Chad Echols
The Echols Firm, LLC
Outside General Counsel for
Williams & Fudge, Inc.