Posts Categorized: Student loans

Common FDCPA violations in student loan collections

The total amount of federal student loan debt in the U.S. is about one trillion dollars. When a borrower falls behind on payments, the student loan collections process begins. Although federal student loan collectors have impressive collection powers, it’s important for consumers to recognize that the Fair Debt Collection Practices Act still prevents a debt collector from making false or misleading statements or otherwise harassing or abusing a consumer. Here are some of the most frequent FDCPA violations in student loan collections:

Misleading threats to garnish wages

Debt collectors often mislead or lie to consumers about the imminence of a wage garnishment if the consumer doesn’t pay immediately. A federal student loan collector may institute an administrative wage garnishment against a consumer who is delinquent. No judgment is required. But there are important steps that a collector must follow before starting an administrative wage garnishment. They must send the consumer a notice–at least 30 days before starting the garnishment–that advises the consumer of their right to inspect the records related to the debt, their right to a written repayment agreement, and their right to a hearing. The consumer then has 15 days to request a hearing. And a private student loan collector doesn’t have the ability to do an administrative wage garnishment. They have to sue the consumer and get a court judgment first. So, a collector can’t just start a wage garnishment immediately if the consumer doesn’t pay and any threats to the contrary probably violate the FDCPA. (more…)

How to deal with student loans

By many accounts, student loan debt has reached crisis levels. Among our clients, it’s a huge issue that can be very difficult to solve. As total student loan debt in the United States approaches $1 trillion, many borrowers are going into default. On federal student loans alone, the number of people who went into default during the first three years after graduation was a staggering 13.4 percent. There are a few things borrowers can do to deal with runaway student loans.

1. If the loan is not in default. If a federal student loan is not in default, there are numerous repayment options available, including Income Contingent Repayment (ICR) and Income-Based Repayment (IBR). Each of these programs allow a borrower to pay a percentage of his income to his loans (sometimes as low as zero percent) and the remaining debt is forgiven after a number of years (20-25). The government has a web site that allows you to explore these options.

2. If the loan is in default. A federal loan goes into default if it has not been paid for more than 270 days. Once default occurs, repayment plans like IBR and ICR aren’t available anymore and the student lender can (and will) tack on a 25 percent collection fee to the balance. The lender can then garnish wages, etc. If a loan is in default, your best bet is rehabilitation. To rehabilitate the loan, the borrower makes “reasonable and affordable” payments for 9 out of 12 months. Once these payments have been made, the loan can brought back out of default. Once it’s out of default, ICR and IBR are on the table again.

3. Discharge outside bankruptcy.  A federal loan can be administratively discharged by the U.S. Government for a few reasons. These include things like the borrower becomes totally disabled or the school closes while the borrower is attending. These debts are discharged by a borrower submitting a form to to the lender.

4. Private student loans are a whole different story. Private student loans have hardly any of the protections that a federal student loan borrower has. If a borrower goes into default on a private loan, his best bet is just to negotiate with the lender for an affordable payment plan. On the other hand, private student lenders have to sue you to collect their money, while federal lenders can skip the legal process and go right to garnishment.

5. Discharge in bankruptcy. Contrary to popular belief, student loans can be discharged in bankruptcy, but it’s not always easy. A student loan can be discharged if paying it would cause “undue hardship” to the borrower. It’s not totally clear what this means, since different courts have interpreted this in different ways, but it’s definitely something more than just not being able to afford to pay off loan on a borrower’s current income. A borrower generally has to show that she will never be able to pay off the loan to have it wiped out in bankruptcy.

6. Payment plans in Chapter 13. One last option for borrowers struggling to pay private loans is Chapter 13 bankruptcy. In Chapter 13, a borrower can force the lender to enter a repayment plan over a five-year period.  This can be necessary where a borrower is being sued and the lender is demanding the full amount to be paid at once “or else.” The downside to this approach is that if the court-ordered payments are low enough, interest will accumulate faster than it’s paid off and the borrower will owe more at the end of the five years.

We can help explain any of these options to you. Get in touch if you want to discuss how to deal with student loans.

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New web site explains student loan default options

student loan

It’s only once in a while that the federal government finds a way to actually help consumers (Zing!). With so many student loan borrowers struggling with debt, it’s about time there was some effective help out there. The Department of Education and the Consumer Financial Protection Bureau have teamed up to publish the (poorly-named) Student Loan Debt Collection Assistant.

The Q-&-A-style assistant takes you through all the different possibilities of being behind on student loans, for public and  private loans, loans deep in default, and loans where you’ve just missed a payment or two. It provides tips on dealing with collectors, eligibility charts for helpful programs such as Income-Based Repayment for federal loans, and provides links to more help. This information is provided in an easy-to-use, Choose Your Own Adventure-style format. The Assistant is a great starting point for figuring out your options when you’re in trouble with student loan collectors.


Can I discharge student loan debt in bankruptcy?

student loan debt in bankruptcy

Photo by Michael Hicks

This post describes how to deal with student loan debt in bankruptcy.

One of the only types of debt that can’t be discharged in a bankruptcy is a student loan, and even then, there are exceptions. But student loan debt in bankruptcy can be discharged in relatively rare situations of “undue hardship”–where the debtor cannot pay back the student loan and probably won’t be able to pay it anytime in the future. Under Minnesota (8th Circuit) caselaw, courts consider: (1) The filer’s past, present and future reasonably reliable financial resources; (2) a calculation of the reasonable living expenses of the debtor and his/her dependents; and (3) any other relevant facts surrounding the bankruptcy case.

1. How to discharge student loan debt in bankruptcy. To attempt to discharge student loans in bankruptcy, the debtor can file an adversary proceeding, which is a lawsuit-within-a-bankruptcy, against the student loan company. Starting an adversary proceeding is no biggie–there’s no court filing fee, and you just file a summons and complaint and send it to the creditor. After that it’s pretty much like any other lawsuit.

2. Undue hardship is based on your ability to earn money to pay off your loans.

  • –  Determining undue hardship has a lot to do with your past and present earning power. The court will look at your job qualifications and earning history. If you have had a long history of low earnings, that might play in favor of discharge.
  • –  Your ability to earn money in the future is even more important. The court may consider your future job prospects, especially as compared to the size of your loan. If there’s no foreseeable way to make a dent in the loan, this will play in favor of discharge.
  • –  Age may also be a factor. While a fresh-faced 22-year old has an entire life of indentured servitude ahead of him to pay his loans, a 65-year old may be considering retirement and won’t have the same long-term earning potential.
  • –  Disability also plays into the determination. Debtors with disabilities may have less earning potential in some cases. This is evaluated along a spectrum–a permanent and total disability that renders someone completely unable to work may be an easier discharge case, while a partial disability that reduces earning power will probably not be the basis for dischargeability on its own.

3. If there’s no money in your budget, there’s no money to pay off student loans. The court will look at your monthly income and reasonably monthly expenses, and determine if there’s any room for repayment of student loans. If your monthly budget is in the red, this will play in your favor.

The court may also look at your eligibility for various loan repayment programs, such as Income Based Repayment (both for federal loans only). If you can afford to make a reduced payment, that might be a factor against discharge. But even if you can afford a reduced payment, it’s not a discharge dealbreaker where the loan will continue to accumulate interest and grow even though you’re making payments.

If you’re struggling with student loan payments and you think some of the above criteria may apply to you, give us a call.