Tuesday, April 23, 2013

The dark side of student loans part 1.

As I said before... I'm using this blog as a second brain to hold all the great info that the first brain forgets because it's too full of useless trivia like "What university did Neil Armstrong do his undergraduate studies at?"  SO as the title says.. this one is about the dark side of student loans.  More importantly what happens after you are no longer enrolled in school... regardless whether you've got a degree or not.  Many of my clients coming through the door have some form of student loan and medical bills.  These two seem to go hand in hand.  I didn't remember college being that rough but at the same time I was also under my parents medical insurance plan so any bills I did incur went to them for 4 out of my 5 1/2 years of college.  I admit... I was blessed.  So here my clients are sitting across from me.  Some have completed college, some haven't, some have jobs, some don't and the clock is ticking.  Some of these folks have been bombarded with collection calls and letters so that they are curled up tighter than an armadillo and just want it all to go away.  What they don't know about student loans is what can really hurt them.  These aren't like those credit card balances... these loans have teeth and can make your life miserable until you get back on track.  So we will start with the worst loan status (because that is often the scenario my clients find themselves in) and work backwards.

LOAN STATUS: DEFAULT

What this means:  You haven't paid on your student loans.  For federal student loans this is 270 days (almost 9 months) without payment.  With private loans this could mean the moment you miss your first payment.  Careful review of your Loan Contract/Promissory Note is required to determine when this event occurs.


WHAT CAN HAPPEN?
According to  Adventures in Education , the Law Offices of Craig Zimmerman and FindLaw:
  • Collection Calls - may be made by either the Servicer or Third Party Debt Collector.  Collectors may call your home or place of business.  The purpose of these calls are to get you make a payment
  • Higher interest or denial of credit — Your credit can be seriously damaged if you default on your student loan. This damage to your credit will affect the interest rates on future loans you are offered and can result in denial of credit opportunities outright.
  • Responsible for collection fees and costs — When you have a defaulted loan, you are charged additional collection fees and costs associated with your loan collection that can substantially increase your loan balance.
  • Wages garnished — Under wage garnishment, a certain percentage of your income may be withheld by your employer and sent to your loan holder to pay for a defaulted student loan.  If your loans are federally guaranteed, the Department of Education serves your employer with an “Administrative” Wage Garnishment for up to 15% on your income.  An Administrative Wage Garnishment is different from a standard garnishment.  The primary difference is there are no court proceedings.  The DOE simply fills out the necessary documents and serves them on your employer.
    In Texas (where I am located), private student loan lenders (non-federal/non-state) cannot automatically garnish your wages like the DOE.  First they must sue you and get a valid judgment against you.  This may seem like a good thing at first but obtaining a judgment against you actually gives them MORE tools to which they can collect on the debt including bank account garnishment and liens on property.  Texas is a community property state so if you cannot pay your student loans, lenders have the ability to go after your spouse for repayment if the loan was taken out during the marriage.   
  • Social Security Offset (Garnishment) - The Department of Education files documents with the Social Security Administration.  The Social Security Administration will withhold an amount up to 15% of your Social Security (including Social Security Disability Income) check. 
  • Tax Refund Offset - The Department of Education files documents with the Internal Revenue Service (IRS) in order to intercept (offset) your tax refund.  The IRS will remit an amount equal to the defaulted amount up to and including the entire amount of your refund.  You will not receive your tax refund and instead receive a letter from the IRS explaining the refund was applied to the defaulted student loan. 
  • Lottery winnings withheld — If you win the lottery, the winnings can be seized and applied toward a defaulted loan.
  • Legal action — In extreme circumstances, the holder of a defaulted loan may take legal action against you to force you into repayment.   If the actions above fail to resolve the issue or they are unsuccessful, the Department of Justice (DOJ) will file a lawsuit against you.  A DOJ lawsuit is almost impossible defend and nearly always results in a judgment against you.  Once the DOJ obtains a judgment, they may enforce the judgment by seizing your personal or business bank accounts, retirement accounts and other assets like your home, automobile or other valuables like jewelry.  Many self employed individuals (doctors, lawyers etc.) make the mistake of thinking because they can’t be garnished, nothing can happen.  The reality could be far worse than a garnishment. 
  • Professional license withheld — You may have your professional license (e.g., cosmetology, real estate, medical) withheld. To have the license reinstated, you must have an established repayment arrangement with your loan holder before a release letter will be sent to the licensing agency. This is the case here in Texas for some licenses.  Please check with your individual licensing board to see if it applies to you.
  • No more federal financial aid — If you default on your student loan, you will be ineligible for further federal financial aid unless your eligibility is reinstated.
  • Whole outstanding principal balance plus interest and fees becomes due at once — This is not uncommon in private loan contracts.  Not receiving a monthly statement does not relieve the borrower from the obligation to pay.

WHAT ABOUT DECLARING BANKRUPTCY?
FindLaw says:
     Bankruptcy law--more specifically, section 523(a)(8) of the Bankruptcy Abuse Prevention and Consumer Protection Act--treats student debt as a priority debt, requiring it to remain after bankruptcy whether it was acquired from a private lender or the federal government. To be able to discharge the debt through bankruptcy, you must show that payment of the debt “will impose an undue hardship on you and your dependents.”

So what is "undue hardship"?  According to the Law Offices of Craig Zimmerman:
     Courts use different tests to evaluate whether a particular borrower has shown an undue hardship. A common test is the Brunner test which requires a showing that 1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans; 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and 3) the debtor has made good faith efforts to repay the loans. (Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987). Not all courts use this test. Some courts will be more flexible, some less.
Although this does not appear to be a difficult standard to meet, for the most part, most debtors are unable to get their student loans discharged. The same standards apply to both private and federal or state student loans.  Additionally, in order to obtain a bankruptcy discharge of student loans, the bankrupt debtor has to file an adversary proceeding (or a lawsuit) against the student loan creditor and have a court determine if the student loan debtor/borrower meets the criteria for discharge.   Since the adversarial process is usually an expensive and time consuming process, debtors who may meet the criteria can find themselves barred from exercising their rights due to financial limitations.

WHAT CAN YOU DO?
  If you are unsure who holds your loan(s) and need help identifying your lender, servicer, and/or guarantor, use the National Student Loan Data System Student Access area to retrieve your loan information.

The studentloanborrowerassistance.org group recommends these tips for dealing with your federal  loan servicer*

It is usually best to communicate with your loan servicer in writing, because you’ll have a physical record of what has been said and done.
  • Keep a record of events. If you speak with someone on the phone, make a note of whom you speak to and when, and what was said. If you use the mail, keep a copy of your letter and of any replies you receive.
  • Keep the evidence. Retain the originals of all receipts, bills, letters and e-mails regarding your account. Provide copies of the originals if you are asked for them. Send letters via certified mail, with a return receipt requested.
  • Stay calm. If you have confronted someone directly, don’t let the emotion of the moment get to you. If you are clearly not getting an adequate response, simply take the next step in the procedure for resolving your problems yourself.
  • Write clearly and concisely. Be polite and courteous, but don’t be afraid to convey the detail of any incident and to articulate your concerns. Write down the facts in a logical order and stick to what is relevant. Remember to include important details like your account number or social security number. Put these details at the top of your letter.
  • Agree on a reasonable time to expect a response. Ask for a response in a reasonable time, and be sure to tell the person how you can be reached.

*The Federal Student Aid Ombudsman of the Department of Education

The studentloanborrowerassistance.org group also has this to say about collection on private student loans.
There is a time limit for private student loan collection and private collectors do not have as many collection tools as the government.   Lawsuits are the main collection tools that private student lenders have.
This does not mean that private student loans are better than government loans. In fact, government loans are usually more affordable and have a lot more borrower protections. However, it is true that if you default, the government has a lot more ways to come after you than private lenders do. Regardless of whether the loan is private or government, it is very difficult to discharge in bankruptcy.
The time limits on how long private student lenders can try to collect vary by state, but are usually about six years after default. You should contact an attorney in your state to find out more about time limits (also called statutes of limitations).
This time limit gives the lender a certain amount of time to sue. If the lender sues during this time and gets a judgment, the amount of time the lender is given to enforce the judgment varies by state. Depending on the state, a creditor may have from five to as much as twenty years to enforce a court judgment. In most states, the creditor is allowed to keep renewing the judgment which basically gives the creditor an unlimited amount of time to try to collect.  State exemption laws determine what type of property, if any, a creditor with a judgment can take.
Private lenders will often hire collection agencies. You have the same rights as with government loans to fight back against any harassment or abuse. The main collection tool private lenders have is to sue you in court. Find out more about how to fight back in court.
Any collection fees for private loans should be stated in the loan agreement. The lender should not be allowed to charge collection fees unless there is a provision like Section L in this agreement. There may also be other laws in your state that place restrictions on the amount of collection fees that private creditors can charge.
Private lenders may negotiate with you to set up a repayment plan or otherwise settle your debt.

If you find yourself having to deal with legal actions taken against you, it may be time to consult an experienced collections lawyer. 

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