The Second Circuit Court of Appeals held in Easterling v. Collecto, Inc.[1] that student loan debt collector Collecto violated the Fair Debt Collection Practices Act ("FDCPA") by sending letters containing the below notice:
****ACCOUNT INELLIGIBLE FOR BANKRUPTCY DISCHARGE****
Your account is NOT eligible for bankruptcy discharge and must be resolved.
The court agreed with the class plaintiff, Berlincia Easterling, who filed suit against Collecto on behalf of herself and 181 others who were sent the letter, that the above statement was false, deceptive and misleading from the perspective of the least sophisticated consumer.
The court first pointed out that Collecto's statement is simply false. Under bankruptcy laws, student loans are presumptively not dischargeable in bankruptcy. However, a debtor in bankruptcy does have the option of commencing an adversary proceeding in the bankruptcy court by filing a summons and complaint against her student loan creditors and arguing for a finding of undue hardship. To succeed in such a proceeding, the debtor has the burden to prove, among other things, that if forced to pay the student loan she would be unable to maintain a "minimal" standard of living for herself and her dependents. So, while the burden on the debtor to prove undue hardship is quite high, the fact remains that some student loans are dischargeable in bankruptcy.
In reversing the decision of the lower court, the Court of Appeals stated that the district court had focused its decision improperly on whether Ms. Easterling's debt had been discharged in bankruptcy, or might be in the future, rather than applying the objective, least sophisticated consumer test. The Second Circuit stated:
Instead, the operative inquiry here is whether the hypothetical least sophisticated consumer could reasonably interpret the Collection Letter's statement that "Your account is NOT eligible for bankruptcy discharge" as representing, incorrectly, that the debtor is completely foreclosed from seeking bankruptcy discharge of the debt in question. When properly framed in this manner, we think it clear that the Collection Letter is "false, deceptive or misleading" in violation of the FDCPA. There may be several steep hurdles in the way of Easterling achieving bankruptcy discharge of her student loans. However, this does not alter the fact that, as Collecto and the district court acknowledge, Easterling at all times retained her right to seek bankruptcy discharge of her debt.
"I think it's a wonderful decision," said Brian Bromberg, counsel to the plaintiffs. "Student loans are really going to be the next big debt crisis."