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Education Department Publishes Regulations for ‘Borrower Defense’ Claims

Back in February, I discussed the surge in student debt “borrower defense” discharge claims. Student debtors discovered an obscure 1995 rule that permitted them to administratively discharge—that is, outside the bankruptcy process—their student loans if they could show that their schools somehow defrauded them. The development occurred just as the for-profit Corinthian Colleges shuttered its doors.

Most of Corinthian’s students could take advantage of the closed-school discharge rule to wipe out their loans, but that didn’t do much good for anyone who graduated or dropped out from the school long ago. Because Corinthian engaged in deceptive practices regarding graduates’ employment outcomes, its students could take advantage of the borrower defense rule instead. Consequently, the department wasn’t ready for the large number of claims and didn’t have any protocol for resolving them. That changed on October 28, 2016, when it published regulations for borrower defense loan relief among other changes.

Here are some of the most important changes:

  • Most significantly, the regulation sets the standard borrowers must meet to prove eligibility for borrower defense claims. They can show one of the following:

(1)  The school breached a contractual obligation to its students.

(2)  A federal or state court issued a judgment against the school relating to the loan or the education for which it was made.

(3)  The school committed a substantial misrepresentation about the nature of its program, its cost, or the employability of its graduates.

The regulations also limit the statute of limitations to six years for all loans made after June 30, 2017; there is no statute of limitations for loans issued before then.

  • The Secretary of Education can grant group-wide borrower defense discharges when he or she can identify groups of borrowers based on individual applications or other information, even if not all borrowers have filed claims.
  • The regulations establish a handful of early warning events that alert students and the public that an institution is facing financial difficulties.
  • The department will go to further lengths to help students whose schools have closed. Students whose schools closed after November 2013 and who did not enroll elsewhere will have their loans discharged automatically.
  • The regulations also curb limitations on pre-dispute arbitration agreements and class-action waivers between students and institutions. For example, Corinthian Colleges required students to waive their right to take their claims to court, which is why so many filed borrower defense claims. The department wants to ensure that institutions pay borrowers rather than the government, if possible.

The department’s press release on the new regulations is here.

According to the department’s report on borrower defense claims, it has approved about 15,700 claims totaling nearly $250 million in loans. As a result, if another large, deceptive institution closes, the new regulations will hopefully ensure for-profit colleges are held accountable for their wrongdoing and the borrowers can obtain relief with minimal hassle.

Although the fallout from Corinthian Colleges is a big deal in the student debt news, most borrowers are not eligible for closed-school discharges or borrower defense claims. The government’s income-based repayment programs will help most, but beyond that a chapter 7 bankruptcy can help student debtors free up income dedicated to other debts, and chapter 13 can benefit student loan debtors as well.

For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA
718-855-6840
http://nybankruptcy.net/

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