Loan Monitor Is Accused of Ruthless Tactics on Student Debt - NYTimes.com

Before she became ill, Ms. Jorgensen took out $43,000 in student loans. As her payments piled up along with medical bills, she took the unusual step of filing for bankruptcy, requiring legal proof of “undue hardship.”

The agency charged with monitoring such bankruptcy declarations, a nonprofit with an exclusive government agreement, argued that Ms. Jorgensen did not qualify and should pay in full, dismissing her concerns about the cancer’s return.

“The mere possibility of recurrence is not enough,” a lawyer representing the agency said. “Survival rates for younger patients tend to be higher,” another wrote, citing a study presented in court.

There is $1 trillion in federal student debt today, and the possibility of default on those taxpayer-backed loans poses an acute risk to the economy’s recovery. Congress, faced with troubling default rates in the past, has made it especially hard for borrowers to get bankruptcy relief for student loans, and so only some hundreds try every year. And while there has been attention to aggressive student debt collectors hired by the federal government, the organization pursuing Ms. Jorgensen does something else: it brings legal challenges to those few who are desperate enough to seek bankruptcy relief.

That organization is the Educational Credit Management Corporation, which, since its founding in Minnesota nearly two decades ago, has been the main private entity hired by the Department of Education to fight student debtors who file for bankruptcy on federal loans.

Founded in 1994, just after the largest agency backstopping federal student loans collapsed, Educational Credit is now facing concerns that its tactics have grown ruthless. A review of hundreds of pages of court documents as well as interviews with consumer advocates, experts and bankruptcy lawyers suggest that Educational Credit’s pursuit of student borrowers has veered more than occasionally into dubious terrain. A law professor and critic of Educational Credit, Rafael Pardo of Emory University, estimates that the agency oversteps in dozens of cases per year.

Others have also been highly critical.

A panel of bankruptcy appeal judges in 2012 denounced what it called Educational Credit’s “waste of judicial resources,” and said that the agency’s collection activities “constituted an abuse of the bankruptcy process and defiance of the court’s authority.”

Representative Steve Cohen, a Tennessee Democrat who has introduced a bill to limit predatory tactics, said, “The government should hold its agents to the highest standards, and I don’t know that we’ve been doing that.”

He added that the government has a special responsibility to use “a standard that’s reasonable.”

The case that caused the bankruptcy judges to accuse the agency of abuse concerned Barbara Hann, who took a particularly drawn-out beating from Educational Credit. In 2004, when Ms. Hann filed for bankruptcy, Educational Credit claimed that she owed over $50,000 in outstanding debt. In a hearing that Educational Credit did not attend, Ms. Hann provided ample evidence that she had, in fact, already repaid her student loans in full.

But when her bankruptcy case ended in 2010, Educational Credit began hounding Ms. Hann anew, and, on behalf of the government, garnished her Social Security — all to repay a loan that she had long since paid off.

When Ms. Hann took the issue to a New Hampshire court, the judge sanctioned Educational Credit, citing the lawyers’ “violation of the Bankruptcy Code’s discharge injunction.”

Educational Credit went on to appeal the sanctions twice, earning a reprimand from Judge Norman H. Stahl of the United States Court of Appeals for the First Circuit, who agreed with the bankruptcy judges that the agency “had abused the bankruptcy process.”

Asked for comment, Educational Credit responded that the case was not related to undue hardship and that it was based on “complicated issues of legal procedure.”

Another case dating from 2012 involved Karen Lynn Schaffer, 54, who took out a loan for her son to attend college. Her husband, Ronney, had a steady job at the time.

But Mr. Schaffer’s hepatitis C began to flare up, and he was found to have diabetes and liver cancer. He became bedridden and could no longer work.