Tag Archives: CFPB

Medical Debt and Credit Reports

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The reporting of medical debt on credit reports has gotten quite a lot of press lately.  The Consumer Financial Protection Bureau has recently done a fairly extensive report that includes a number of findings.  One of these is that 1 in 5 Americans has outstanding medical debt on their credit reports.  Another is that slightly more than half of all debt in collections is medical debt.

The CFPB makes the point that part of the problem with medical debt appearing on credit reports is rooted in the complexities of the health insurance billing process.  No dispute there.  The CFPB also wants to enact regulations to change the way that medical debt is reported on credit reports.  The goal is to make medical debt less detrimental to a credit score (at least as it is currently calculated) than other kinds of debt.  I have a problem with that.

WHAT!?!  I’m supposed to be all pro-consumer.  How can I have a problem with that?  Simple.  First of all, there is no such thing as a single credit score.  We all have many of them, and they change constantly.  Establish rules for how credit scores are to be calculated, and the credit reporting agencies will simply change the way they package the information.  Why?  Because they exist to serve their clients’ needs, and their clients are people who lend money and collect money.

But, but, but, classifying medical debt on credit reports differently from other (presumably less noble debt) only makes sense!  If you do that, than anyone looking at a credit report can tell that this person always pays for his car, he just can’t pay that horrendous hospital bill that his insurance company refused to pay.  So, a car lender ought to be able to glance at a credit report and score and tell that this person makes his car payments, so it would be good business to make him a car loan.  Right?

Not so fast.  If someone applying for a car loan owes $30,000 to the local hospital the fact that he has always made his car payments before is not going to stop the hospital from suing him and garnishing his wages.  If the local hospital is taking 25% of the gross off of just about anyone’s pay check (Oklahoma law, only), that could change whether or not he is still able to make his car payment.

Despite popular opinion, credit reports (and credit scores) don’t measure how good a person you are; and the idea of reporting medical debt differently seems to buy into that fiction.  An outstanding liability that remains legally enforceable — whether it be medical, taxes, child support or credit cards — is always going to be a threat to someone’s ability to repay a new obligation.  Wage garnishments, bank levies or any other form of enforcement action that is available to the creditor will impact on someone’s ability to make future payments.  Changing how something is reported or how it is factored into a magic number won’t change that.

The ways to make meaningful changes in your ability to access credit remain the same.  First, if your insurance company denies a claim — appeal it.  Complain to the State insurance commissioner.  Do everything you can to get the claim paid.  Second, police your credit report.  If something shouldn’t be there, get it removed.  If debt has been re-aged or is otherwise no longer enforceable — dispute it.  If you owe the money and it really is legally enforceable, then you either need to find a way to wait it out (and hope that they don’t sue you just before the Statute of Limitations runs) or consider a bankruptcy filing.  Even if a chapter 7 isn’t the answer, a chapter 13 might be.

Oh, and don’t be afraid to ask for help; and don’t be embarrassed.  No one who knows enough about credit reports or the collection industry to be of any use will confuse anything on your credit report with your value as a human being.

Elaine

Student Loans, Auto Default Clauses: or, Everything Old is New Again

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I was recently discussing issues with student loans, and private student loans in particular, with a staffer for one of my Congressmen. The staffer said something along the lines of, but isn’t student loan debt good debt? My response? Student loans, especially private student loans, may be the worst kind of debt – even worse than credit cards. His expression was fun. He did keep his coffee off his tie, though. Points for that.

There are a lot of reasons I’m not just real gung ho on student loans – especially private student loans. One of those reasons has been getting some press this week. Here is a link to a NY Times article on auto default clauses in private student loans. There have been several others recently, but this was the first one I saw.

http://m.washingtonpost.com/business/economy/us-agency-urges-private-lenders-to-ease-automatic-default-rules-on-student-loans/2014/04/21/d06adeee-c97f-11e3-95f7-7ecdde72d2ea_story.html

Most private student loans require a co-signer, usually a parent or grandparent. Many of those loan documents also include language known as an auto default clause. An auto default clause means that the loan is deemed to be in default if a particular event happens – EVEN IF PAYMENTS ON THE LOAN ARE CURRENT. The current press is about auto default clauses that trigger an event of default if the co-signer files for bankruptcy or dies.

To be quite blunt:
Bad news – Dad is dead.
More bad news – your student loans are now being reported in default to the credit reporting agencies, even though you’ve never missed a payment.

There is a good argument that the an auto default triggered by a bankruptcy filing of the co-signer is unenforceable, and I foresee some interesting litigation on that issue. The death of the co-signer, though, is going to be valid unless some lawyer who is far more creative than I am comes up with something I haven’t thought of.

A lot of the NY Times article referenced above has to do with encouragement from the Consumer Financial Protection Bureau for lenders (or, more accurately the loan servicers) to find ways to avoid placing otherwise performing loans into default status. There are a number of problems with that encouragement. First of all, it is just that, encouragement. I am not aware of any authority the CFPB has to require anything. Second, the same problem is showing up here that we had getting loan modifications during the mortgage crisis. Most of these loans have been securitized. The entity that the borrower deals with (Sallie Mae, AES, etc.) isn’t actually the lender. They are the servicer, they just manage the loans on behalf of the ultimate investors, and they do so pursuant to the terms of a contract that limits their ability to modify the loans.

Part of the securitization process is taking a large body of loans, pooling them together and using their income stream to support payments to investors who invest in the large pool. To do that, the individual loans that go into a pool must share certain qualities; and one of the qualities that makes a pool of loans like this more attractive to investors is the presence of co-signers – or, having more than one person responsible for repaying the loans. So, encouragement from the CFBP is nice, but I don’t think I will hold my breath on seeing any real changes here.

Of course, the real victims are the college graduates who are making their loan payments and then find out that the interest rate on a car loan is going to be sky high or they can’t qualify for a mortgage; why? Because their student loans are in default – yea, the ones they are PAYING every month.

I’m sorry, but that sucks.

They took out those loans (for the most part) when they didn’t have a lot of experience with financial products. Their parents (or grandparents) signed. Their school told them to sign. So, they signed. Even if they read the fine print, they very well might not have realized with an automatic event of default means. Their school should have. Their parents (or grandparents) should have, and they might have; but they saw no other (or no better) way to pay for college.

There isn’t much I can do about people dying; but filing bankruptcies for people who might have co-signed student loans is part of my job. I’m currently thinking through some ideas with other attorneys to mitigate the consequences of a bankruptcy filing when the debtor has co-signed private student loans. Keep in touch.

Elaine

 

 

Dealing With Debt Collectors

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The relatively new Consumer Financial Protection Bureau has put some useful resources on the Bureau’s website to deal with obnoxious debt collectors.  The first thing on this page are links to two new bulletins providing notice to debt collectors of practices the Bureau finds abusive.  These things just make kind of fun reading.

The meat of the page are the so-called “Action Letters”.  These are form letters developed by the CFPB to help consumers implement their rights under existing consumer protection laws (primarily the Fair Debt Collection Practices Act).   These letters serve the following purposes:

  • To dispute a debt and request additional information about the debt;
  • To dispute a debt and demand that the collector prove that the consumer is responsible for the debt and to stop contacting the consumer until they have done so;
  • To restrict the times and methods by which the collector can attempt to contact the consumer;
  • To notify the collector that the consumer has retained an attorney and all contacts should go through counsel; and
  • A cease and desist letter — this is a letter instructing the collector to stop all contact attempts with the consumer.

These letters are very useful tools, but they do have some downsides.  FDCPA disputes almost never produce what you hope they will, and if you really do owe the debt, it will buy you only a brief respite from collection activity.  If, however, you are willing to proceed with active litigation against the collector, this kind of verification letter can be extremely valuable.

The most valuable restriction on time and place of contact is preventing the collector from contacting you at work.  This can be very effective.  It will not, however, stop overly aggressive collectors from calling your employer — just to verify that you really do work there — yea, right.

Attorney retention letters are really better coming from the attorney.  Far too often people will tell a collector that they are represented by a certain attorney (whose name they have plucked from the phone book or a website) when they really aren’t, because they have heard that will stop collection calls.  Believe it or not, the collectors really will verify this; and you will not be winning friends with an attorney you may need to actually represent you down the road if his or her phone starts ringing off the hook with creditors of a supposed client the attorney has never heard of.  Bad plan.

Cease and desist letters basically are a mechanism for requiring that collectors stop all collection contact.  It does not mean they can’t sue you.  Well, if they can’t call you, they can’t harass you by mail and you aren’t represented by counsel; there really isn’t much left for them to do.  Now, not every collector sues upon receipt of a cease and desist letter; and I have clients who have used them very successfully, but only in very specific fact situations.

Finally, at the bottom of this page the CFPB outlines its complaint mechanism for lodging complaints against collectors and creditors.  By all means, have at it.  In fact, I encourage everyone to investigate the resources available from the CFPB and make use of them.  Just be aware of the fact that not everything will do what you expect, and most things do have consequences.  Getting a breather from collection calls is not a solution, it is a tool.

Elaine