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Federal Deception Law: 4.4.4.2 Holder’s Actions As a Deceptive Practice

When a creditor’s promissory note violates the FTC Holder Rule, the creditor is engaging in a deceptive practice. As one court put it, the creditor engages in “fraudulent conduct which creates a likelihood of confusion or misunderstanding” since the “FTC Regulation preserving defenses serves to eliminate confusion and misunderstanding created through an artificial bifurcation of a transaction by an installment seller in an effort to insulate the duty to pay from the duty to perform.”275

Federal Deception Law: 4.4.4.3 Holder’s Actions As a Violation of State UDAP Regulations

Massachusetts UDAP regulations indicate that creditors violate the state UDAP statute if they fail to comply with standards similar to the FTC Holder Notice. These standards are that lenders are subject to all defenses if they are related to the seller, they prepared the loan documents, they supplied the loan forms, the seller recommended the creditor and the creditor financed at least two consumer loans related to the seller in the calendar year, or the creditor issued a credit card used in the transaction.283

Federal Deception Law: 4.4.4.4 Holder’s Actions As an Unfair Practice

The creditor’s use of a contract violating the FTC Holder Rule fits neatly into the FTC’s definition of an unfair practice. There is substantial consumer injury and the consumer could not reasonably avoid the practice. Nor can there be any countervailing business justification for a lender to engage in loan practices that involve a violation of a federal regulation.287

Federal Deception Law: 4.4.5 Aiding and Abetting Seller’s Omission of Holder Notice

Aiding and abetting may be an appropriate challenge to a lender’s participation with the seller in a scheme to avoid the FTC Holder Rule requirement. For example, in California, aiding and abetting involves a party knowing that another’s conduct is improper and providing substantial assistance or encouragement to that other party.298 In a California federal case, students alleged a claim for aiding and abetting when a bank was a sophisticated player, well aware of the FTC Holder Rule requirement and consciously sought to avoid it.

Federal Deception Law: 4.5 State “Holder” Statutes

Virtually every state has enacted state “holder” laws.316 These laws though vary dramatically from state to state. One significant aspect of many of these laws is that they are not dependent on a notice being placed in a note; consumers can raise defenses and, in some cases, affirmative claims as a matter of the state’s substantive law.

Student Loan Law: 15.4.2.2.2 Long-term income-driven repayment plans should play no role under the second Brunner prong

The improper focus on a long-term income-driven repayment (IDR) plan can derail the analysis under the second Brunner prong, just as it can under the first prong.337 The second prong requires evidence that the debtor’s difficult financial circumstances are likely to persist. For purposes of the Brunner test, the relevant monthly payment amount is the same under the first and second prongs.

Student Loan Law: 15.4.2.3.1 Overview

The third prong of the Brunner test requires that the borrower show a good faith attempt to repay the loan. This prong looks to the debtor’s past conduct. As a legal standard it has been particularly controversial, primarily due to its subjectivity, and also because it is not based on any specific Congressional authority.391

Student Loan Law: 15.4.2.3.3 Emphasis on income-driven plans conflicts with the Bankruptcy Code

The Bankruptcy Code undeniably provides an opportunity for a debtor to obtain an absolute and immediate discharge of student loans if the statutory conditions are met.429 No comparable discharge is available under the Department’s regulations and administrative collection programs.430 For these reasons, the courts have found that there is an inherent conflict between the “fresh start” goal of the Bankruptcy Code and the mounting long-term debt burden often associated with an income-driven repaym

Student Loan Law: 15.4.2.3.4 Impact of long-term income-driven plans that do not materially reduce principal balance and are harmful for borrowers

When an income-driven repayment (IDR) plan does not materially reduce the principal balance, and is harming the borrower, there should be no consequences for non-participation under the good faith prong. The long-term impact of an IDR plan upon a debtor can fairly be characterized as the opposite of a bankruptcy discharge. A long-term IDR plan, even one with $0 payments, can be a meaningless exercise—or worse. For debtors who anticipate no significant improvement in their finances, the plans exacerbate the long-term hardship.

Student Loan Law: 15.4.2.3.5 Tax consequences of loan forgiveness

When a debt is forgiven, as may occur upon successful completion of a long-term repayment plan, the amount forgiven is generally treated as taxable income to the debtor.455 However, the American Rescue Plan Act of 2021 (American Rescue Plan Act) temporarily removes federal income tax consequences for all federal—and most private—student loan discharges and cancellations that occur between January 1, 2021 and December 31, 2025.456 The tax consequences associated with loan forgiveness are discusse

Student Loan Law: 15.4.2.3.9 Debtors should be familiar with their own servicing history and long-term income-driven repayment plan options

Advocates need to be familiar with the status of the borrower’s student loan accounts in order to respond to creditor arguments focused on long-term income-driven repayment (IDR) plans. The Department’s National Student Loan Data System (NSLDS) provides information about the current payment status for all federal loans.494 In addition, the Department’s Loan Simulator tool allows assessment of specific repayment options for a borrower with federal loans.495

Student Loan Law: 15.4.3 Other Hardship Factors

The student’s undue hardship argument may be stronger when the student loan arose from a for-profit school that closed down or defrauded the student. Absent a meaningful educational experience, the student has no job skills and, because of the default, is ineligible for future government educational loans. If a discharge is not granted, the student will not be able to go back to school and will not be able to obtain a decent paying job, making repayment now or in the future an undue hardship.

Student Loan Law: 15.5 Partial Discharge or Modification of Student Loan

Particularly in cases involving large student loan debts owed by middle-class debtors, courts have been exploring the possibility of offering a partial hardship discharge. The court may find that the student has future earnings potential but that the amount of debt is still excessive.

Student Loan Law: 15.7.1 Procedure for Determining Dischargeability of Student Loan

Whether a student loan is discharged based on hardship is not automatically determined in the bankruptcy proceeding. The debtor must affirmatively seek such a determination. If the debtor fails to do so, and a loan holder subsequently attempts to collect on the loan, the loan’s dischargeability can be resolved at that later date either by the bankruptcy court or by a state court in a proceeding relating to the note’s collection. In general, it is best to resolve the loan’s dischargeability in the bankruptcy court while the case is pending.

Student Loan Law: 15.7.2 Proper Parties and Service

When preparing an undue hardship adversary proceeding, advocates must be careful to name all potentially relevant parties as defendants. Litigation against the wrong parties can waste time and provide no relief.556 Checking the National Student Loan Data System (NSLDS) can help identify the appropriate parties when the loans are government-related.557 Guarantors should be included when appropriate so that a judgment will be binding against them.

Student Loan Law: 15.7.3 The Timing of the Adversary Proceeding

An adversary proceeding to determine the dischargeability of a student loan may be filed by the debtor or the creditor.565 Generally, the proceeding may be commenced at any time, and a bankruptcy case that has been closed may be reopened without payment of an additional filing fee in order to obtain a dischargeability determination.566 According to some courts, a potential exception to this general timing rule involves requests for a dischargeability determination made early in a chapter 13 case

Student Loan Law: 15.7.4.1 The Timing of the Adversary Proceeding in Chapter 13

Chapter 13 debtors may also file an adversary proceeding to determine the dischargeability of student loan obligations. The issue may be raised at any time during the three- to five-year period of the plan,580 and timing considerations apply similar to those discussed previously.581 All courts agree that bankruptcy courts have jurisdiction to adjudicate undue hardship claims at any time during a chapter 13 case.

Student Loan Law: 15.7.4.2 The Necessity for an Adversary Proceeding in Chapter 13

The United States Supreme Court in United Student Aid Funds, Inc. v. Espinosa583 addressed an issue involving how student loan dischargeability must be raised in chapter 13. The Court in United Student Aid Funds, Inc. v. Espinosa did not examine any broad questions related to the substantive standards for discharge of student loans in bankruptcy. Rather, the Court focused narrowly on a chapter 13 procedural issue that had provoked disagreement among the circuit courts.