This post explains how to manage student loan collections and get out of default both with and without bankruptcy. It explains in a short page what you need to know in a couple of minutes and gives you a plan of action. Each part of this can be expanded as a topic if you need to know more about that section in depth.
Bankruptcy and private student loan collections
I often file Chapter 13 cases to stop private student loan collections. Bankruptcy may not discharge the private student loan but it can still kill it. The private student loan was made by a bank or lender. Imagine not being paid. Then spending money for an attorney to sue the student to get your money back. Then the student files a Chapter 13 where the lender or bank is repaid zero for 5 years. That is exactly what happens most of the time when I have a client who has been sued for his private student loans.
There is a statute of limitations for private student loans. There is no statute of limitations for government loans. If a private student loan does not collect for 3, 5, 10 or 15 years you may have run the statute of limitations for the private loan. This depends on your state. In Kentucky, the statute of limitations changed in 2014 from 15 to 10 years. Time in bankruptcy is not added to the time you have to wait out.
But filing Chapter 13 normally keeps the bank from every suing to collect again. The lawsuit is eventually dismissed for the lack of prosecution in a state case. You see private student loans have to sue to collect. Government student loans don’t don’t have to sue to garnish wages and bank accounts. Government student loans can even garnish your social security check without going to court.
Bankruptcy and Government student loan collections
Sometimes Chapter 13 is an excellent tool to modify government student loans though. Especially if you are being sued. You never want a student loan judgment to happen. Judgments are collectible for 20 years in Kentucky and can be renewed for another 20 years over and over again.
You can file a Chapter 13 bankruptcy and the collections stop and garnishments don’t happen. Bankruptcy also stops the judgment from being issued in state court. With government student loans the collections stop while you are in Chapter 13 but you get relief for 5 years.
Processing a rehabilitation or consolidation of the student loan becomes easier, during bankruptcy. If you are a candidate for the undue hardship but the case is borderline, filing for rehabilitation or consolidation may allow you to get the undue hardship. If the terms the lender or servicer is offering are unreasonable and hardship then the loan becomes a candidate for an undue hardship discharge. It may force the Department of Education to give you reasonable terms.
In bankruptcy, a student loan is not discharged unless you get an undue hardship discharge. You can only get the undue hardship by filing a separate lawsuit called an adversary proceeding. Getting an undue hardship is not impossible it is just rare and difficult to do. Only about 500 people get an undue hardship discharge every year. We do have a checklist if you need to analyze your case.
The history of bankruptcy and student loan collections
Originally student loans in the 1970s were just as dischargeable as credit card debt. In the 80s – 90’s you were required to wait 3 and later 7 years before students could discharge a student loan. During the late 90s government student loans were made non-dischargeable. In 2005, banks contributed enough to congress to make the private student loans non-dischargeable unless you could get the undue hardship.
Since about 2012 Congress has repeatedly tried to bring back private student loan discharges and better programs. In 2020 most of the democrat candidates have promised to improve student loan repayment programs. But since 2016 Trump’s Department of Education director has refused to even process fraud and disability discharges. One judge threatened her with contempt of court after she was ordered to discharge these loans and failed to do so. However, as of January 1, 2018, President Trump made Death and Disability discharges tax-free. All this leaves with more of a question about how to manage student loan collections than an answer.
Bankruptcy as a tool to manage student loans collections
When I prepare a bankruptcy that was caused by student loan debt I normally place private student loans as being paid outside the plan. In Chapter 13 and the private loans are then paid zero for 5 years. After being paid zero for 5 years private lenders usually go pester someone else. My client’s car loans etc. are paid inside the Chapter 13 plan with a very small repayment to unsecured debts.
Income-Based Repayment plans to cure student loan defaults
Government student loans should be in an income-based repayment plan of some kind there are about 8 different programs like PAYE, REPAYE, IBR etc. You normally need to be in an income-based plan to make you plan payments affordable. Income-based repayment plans are on a sliding scale from a zero payment to 10% of family income. Some programs do not use family income and only calculate your income. You need to be in the correct program or this can be costly especially if your spouse makes most of the income.
Often the servicer places you in the program which profits them the most, not what is best for you. There is a program which calculates the advantage of all 8 programs and then you simply choose what you like best. You can check it out at studentloanify.com. If you use a qualified attorney to process your application you may be placed into the program which is best for you. Please beware that just like there were IRS tax settlement and debt settlement companies which were scams there are also student loan services that will not deliver what they promise.
Never accept a forbearance or deferment if you are in an income-based repayment plan. If your income is zero your payment is zero and it counts as one of the years you repaid the student loan debt. Most income-based loans require 20 years of repayment and working for a non-profit may allow you to repay the student loan in just 10 years.
Rehabilitation to cure student loan defaults
Servicers love rehabilitation because the payments you pay in rehabilitation are often charged to late fees and interest. They collect a percentage of these payments. This is why the often set such high payments. It increases the student loan servicer’s profits.
The benefit to the borrower in rehabilitation is it removes the default from your credit report. Often this will qualify you for a home or better car loan rates by improving your credit score. Overnight on completion of the 9 payments, and rehabilitation your score normally improves. Either you are now on time or your account notation may show you made these payments on time for the prior 15 years. Rehabilitated federal direct loans are subject to collection fees and costs but it is no longer added to your loan balance.
Rehabilitating and consolidating student loans is not the practice of law. I do not process applications for rehabilitation or consolidation. Josh Cohen is recognized by the National Association of Consumer Bankruptcy Attorneys for his work in rehabilitating and consolidating student loans. Josh Cohen can process your student loan application to get you the best deal but he does charge for his services. Rehabilitation is only allowed one time. Government Student Loan Rehabilitation requires 9 of 10 on-time payments. If you are in default you should normally work to get out of default with rehabilitation or some combination of rehabilitation and consolidation.
Is it really a non-dischargeable student loan?
Always remember the servicer of your student loan never works for you. The bank’s lawyer also never works for you. They are paid for collecting the principal, late fees and interest. Banks servicers and the bank’s attorney won’t tell you how to sue the bank. They won’t tell you how to not pay the debt. Unless the debt is in default the Fair Debt Collection Practices Act does not apply to the servicer. They can legally lie to you. Also, the FDCPA act does not apply to the Department of Education only a debt collector collecting consumer debt which is in default.
The Debt the servicer lender or debt collector is attempting to collect maybe a student loan that is not protected from bankruptcy. A loan for tuition is dischargeable. A student loan by the military to a serviceman is often just as dischargeable as a credit card. But one military program student loan program is never dischargeable. Only qualified student loans are protected. Most air pilot and cake baking schools are not qualified. Which loans are protected is defined by a section of the social security code.
Servicer conflict of interests
Anything you pay the servicer will tend to go to late fees and interest so they can collect up to 40% of what you are paying. If the servicer processes a rehabilitation or loan consolidation they also get paid. If they call or write a letter they are paid. Do not think the servicer works for your best interests.
Servicers have been sued for putting students into the worst student loan programs. They respond they don’t work for the students. They work for the bank or the Department of Education. Servicers like Navient and Sallie Mae have no duty to give the student the best deal. Instead, they get paid more by giving students the worst loan and have rewarded their workers based on just that.
Much of the rest of the information on how to manage student loans collections is on our website.