Private Student Loans Going Into Default When Co-Signer Dies or Files Bankruptcy

The New York Times reports that many private student loans contain provisions that allow the lender to declare the entire balance due and payable after a co-signer dies or files bankruptcy, even when the borrower is current on loan payments.

The Consumer Financial Protection Bureau (CFPB) published an advisory regarding this practice on April 22, 2014. The government agency has received an increasing amount of consumer complaints regarding the practice. While the CFPB does not state that the practice is illegal, it sternly warns private student loan borrowers about the real consequences when a co-signer dies or files bankruptcy.

The CFPB recommends that borrowers contact their private student loan servicer and request a "co-signer release", which can help both the borrower and the co-signer. Often, the lender will require a credit check and a history of timely payments before awarding a co-signer release. Sample request letters can be found on the CFPB's Website.

Sources

Perez-Pena, Richard, Student Loans Can Suddenly Come Due When Co-Signers Die, A Report Finds, The New York Times, April 22, 2014. http://www.nytimes.com/2014/04/22/us/student-loans-can-suddenly-come-due-when-co-signers-die-a-report-finds.html?_r=0.

Chopra, Rohit, Consumer advisory: Co-signers can cause surprise defaults on your private student loans, Consumer Financial Protection Bureau, April 22, 2014, http://www.consumerfinance.gov/blog/consumer-advisory-co-signers-can-cause-surprise-defaults-on-your-private-student-loans/.

CFPB Advance Notice of Rulemaking: Debt Collection Concerns

The Consumer Financial Protection Bureau (CFPB) recently released a 114-page Advance Notice of Rulemaking seeking comment, data, and information about debt collection practices affecting consumers. The notice discusses the federal Fair Debt Collection Practices Act (FDCPA), a law which governs the collection of consumer debts by third parties. The Bureau expects to "address concerns relate to debt collection using its authority under the Dodd-Frank Act to issue regulations concerning unfair, deceptive, and abusive acts or practices and to establish disclosures to assist consumers in understanding the cost, benefits, and risks associated with consumer financial products and services."

The Bureau is now seeking answers to the 162 questions posed in the Advance Notice. The questions tend to suggest that upcoming new requirements will be imposed on consumer debt collectors, including original creditors collecting their own delinquent debts.

Source: Sherman & Howard, LLC, JD SUPRA BUSINESS ADVISOR: CONSUMER DEBT COLLECTION (December 12, 2013),http://www.jdsupra.com/legalnews/consumer-debt-collection-58060/.