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Increased Regulation Threatens For-Profit Education

Increased Regulation Threatens For-Profit Education

For-profit post-secondary education is quickly becoming one of the most regulated industries in America. Nowhere is that trend more true than in student bankruptcies. When a current or former student files for bankruptcy protection, federal law often requires a for-profit educational institution to simultaneously take and desist from action, to both move and stand still. Understanding those federal laws and regulations, along with the intricacies of the Bankruptcy Code, is a critical component of successfully managing receivables for a for-profit educational institution in today’s climate.

This article provides a brief overview of the competing requirements imposed on for-profit schools, and offers strategies for creating robust and efficient procedures to protect both the school and its bottom line.

Over 1.5 million bankruptcy petitions were filed in 2010, according to the Administrative Office of the US Courts. Many of those petitions were filed by current or former students of for-profit educational institutions. The vast majority of these students will not be familiar with bankruptcy law, and as a result students often attempt to discharge or reduce amounts owed on federal student loans provided pursuant to Title IV. These misunderstandings often arise out of a student’s mistaken belief that bankruptcy automatically wipes out all debt. Additionally, many students simply stop attending courses prior to or immediately after a bankruptcy filing. This can lead to negative results, as the institution may be forced to return financial aid after the student falls out of attendance, hurting its bottom line.

When a student files a bankruptcy petition, a for-profit educational institution must:

1. Immediately cease any and all collections efforts (including by collection agencies) in accordance with the automatic stay imposed by the Bankruptcy Code;

2. Comply with student requests for transcripts, earned diplomas, or degrees, even if the institution’s agreements with the student state that these documents are property of the institution;

3. Permitting the student to continue courses presently enrolled in, even if those courses have not been paid for;

4. Review the student’s file to determine if the student received federal financial aid;

5. Evaluating the types of any financial aid received, and complying with requirements imposed by the Code of Federal Regulations for securing balances. This can include an evaluation of the likely costs of an adversary action or challenge to a student’s proposed Chapter 13 plan, if the student is attempting to discharge or reduce financial aid;

6. Retain counsel to commence an adversary complaint or file an objection; and

7. If the student withdraws or ceases attending, performing a Return of Funds Calculation as required by the Department of Education.

Thus, the requirements of the Bankruptcy Code and the Code of Federal Regulations often require the education institution to act antithetically to its for-profit roots. Failure to comply with federal requirements can lead to severe penalties, including:

1. Fines imposed by the Bankruptcy Court for each violation of the automatic stay;

2. An award of the student’s attorneys’ fees and costs for any violations, or for adversary proceedings;

3. Suspensions or potential loss of eligibility for federal financial aid in administrative actions brought before the Department of Education pursuant to the Code of Federal Regulations.

Fortunately, there are solutions that can prevent these negative outcomes. By proactively formulating risk-analysis and compliance policies, a for-profit educational institution can minimize its risk while still protecting its rights to receive compensation for the valuable academic courses it provides.

Bankruptcy policies created for institutions need to provide robust collections controls, both for in-house accounts receivable departments and for outside collection agencies. Additionally, academic advisors and other student support need to receive training on the basics of student bankruptcies to prevent inadvertent violations.

Policies can also seek to educate financial aid students about the importance of maintaining their attendance prior to and during a bankruptcy proceeding. This can minimize the number of students who fall out of attendance, and in turn reduce the amounts of financial aid the institution is required to return to the Department of Education. It also helps students move ahead toward attaining their degrees or diplomas, and helps ensure that graduation rates do not fall. Ultimately, proactively educating students about bankruptcy prior to a filing benefits both the institution and the students.

For-profit educational institutions also need to foster close relationships with outside counsel who understand their unique needs. The use of outside counsel can help shield an institution from claims of violating the automatic stay, and also provide a relief valve for handling problem students, who may simply need inaccurate assumptions about the effect and limitations on bankruptcy corrected.

Once notified of a student bankruptcy filing, outside counsel can review bankruptcy dockets for student creditor schedules, monitor deadlines and prepare a Proof of Claim, and if necessary evaluate student claims that repayment of their student loans would impose an undue hardship, pursuant to 11 U.S.C. § 523(a)(8). Outside counsel is often necessary to litigate adversary proceedings and objections to Chapter 13 plans. However, because the costs of pursuing an adversary action can often exceed the amount in controversy, such actions should generally be avoided. Here again, a clear bankruptcy policy and proactive contact can help avoid the costs and exposure related to adversary actions in the first place.

Ultimately, for-profit educational institutions, collection agencies, and outside counsel need to function towards the same goal of ensuring regulatory compliance while protecting the institution’s bottom line in a cost-effective manner.