Some student-loan companies are 'ignoring' court orders and continuing to collect borrowers' debt after they received relief through bankruptcy, a federal consumer watchdog finds

College graduates
College graduates.Robyn Beck/AFP via Getty Images
  • The CFPB found some student-loan companies have continued to collect on debt that was discharged in bankruptcy.

  • The agency on Thursday put those companies on notice, ordering them to return the payments back to borrowers.

  • It comes after the Education and Justice Departments reformed bankruptcy guidance for borrowers last year.

A top federal consumer watchdog is putting student-loan companies on notice for potentially illegal behavior that's harming borrowers.

On Thursday, the Consumer Financial Protection Bureau (CFPB) released a report detailing recent findings that some student-loan companies have engaged in unlawful behavior by sending borrowers' loans back to collections after a bankruptcy court approved a discharge of their debt. The CFPB is directing those companies to "return illegally collected payments to affected consumers and immediately cease these unlawful collection tactics," and it will continue to examine how companies are handling loans that are discharged in bankruptcy to detect illegal behavior.

"When a court orders the discharge of a loan, lenders and servicers should not treat this as a suggestion," CFPB Director Rohit Chopra said in a statement. "The CFPB has found that some servicers are ignoring bankruptcy court orders. The student loan servicing industry should ensure that their collection practices are compliant with the law."

While the CFPB's report did not explicitly name which companies have engaged in misconduct, it elaborated on the types of actions by companies that harmed borrowers. For example, it found that companies were in violation of consumer protection laws by resuming collections on debt that was already discharged by a bankruptcy court, which was "likely to cause substantial injury to consumers because the representations made to consumers in billing statements and other collection attempts were likely to result in consumers making payments they did not owe."

"In fact, CFPB examiners also observed that after exiting bankruptcy and being presented with bills from their student loan servicers, most borrowers made payments toward the debts, sometimes paying thousands of dollars on discharged debts," the report said. "Since the consumers could not control the servicers' actions, consumers could not reasonably avoid the injury."

The companies' unlawful misconduct only adds to the difficult process borrowers must face when attempting to get rid of their student debt through bankruptcy. For years, borrowers have had to meet the "undue hardship" standard, which has been a challenging feat — it requires them to show that they cannot maintain a minimal standard of living, that their circumstances aren't likely to improve, and that they have made a good-faith effort to repay their debt.

In November, the Education and Justice Departments released new guidance to make the bankruptcy process easier for borrowers by allowing debtors to complete a self-attestation form to help the departments assess their discharge request, and even in circumstances where the borrower will not qualify for a full discharge, the departments will consider partial relief.

Under the new guidance, the undue hardship standard still exists, but it gives the Justice Department clear standards for recommending relief to the judge without having to go through time-consuming investigations.

CFPB's Thursday announcement is another layer of protection for borrowers. It comes after private student-loan borrowers in November secured a nationwide injunction on Navient, a loan company that faced a lawsuit over continuing to collect on loans discharged in bankruptcy.

Insider also reported last year that, according to a report from advocacy group Student Borrower Protection Center, 2.6 million borrowers with private student debt could be eligible for as much as $50 billion in loan cancellation through bankruptcy, but companies' predatory practices were keeping that from happening.

"After years of unfair, deceptive, and shamelessly predatory behavior by some of the largest financial companies in the world, the nation's top consumer watchdog has finally stepped in to protect student loan borrowers," Amber Saddler, counsel at the Student Borrower Protection Center, said in a Thursday statement. "Now, all eyes are on companies like Navient, which must immediately return the money it stole. The entire student loan industry should take notice—the days of cheating borrowers out of their legal right to bankruptcy are over."

Read the original article on Business Insider