Due to federal laws, bankruptcy has never been an option for people who are suffering from massive student loan debt. Although technically it was possible to claim bankruptcy and have your student loans forgiven, it meant proving to a judge that it would cause extreme hardship and a ‘certainty of hopelessness’. In other words, very few people would qualify. The standard is the same whether you have a federal student loan or a private student loan but current legislation in Congress is seeking to change that standard, at least for private student loans. The change would make them eligible to be discharged under rules that will be similar to those that apply to credit cards and other types of consumer debt.
Until that change happens, there are a number of federal loan programs that will help you to reduce your payments and, in some instances, qualify for forgiveness of your loans. If you have private loans, the good news is that many lenders are offering deals to their borrowers to keep their payments coming, rather than letting them go into collections.
It was only a short time ago that lenders rushed to offer private loans to students, even those students whose credit wasn’t exactly sterling. Today those borrowers, who couldn’t afford their loans to begin with, are defaulting in droves. Mr. Joshua Cohen, an attorney who specializes in debt, believes that “ the industry is either going to take a bath or start coming after people”. Lenders, of course, wish to avoid that.
Many are beginning to offer interest-only repayments and other types of arrangements that lower payments for specific period of time. To see if you qualify you need to check your promissory note and see if this is a provision that’s been included. While this doesn’t work for everyone, it is definitely worth a try and should be talked about, if not negotiated, with your lender.
If you and your bank can’t reach an agreement you can ask them for forbearance, something that will allow you to make no payments at all, usually in increments of three months and usually for no more than a year’s time. While lenders are a bit less willing than they once were to sign off on deals like these, if you can prove that it will get you back on track they might just do it. It’s also important to remember that, in most cases, contacting your lender sooner is better than later, before problems become more pronounced.
As far as going into default, you simply have to miss one private loan payment in order to be seen as being in default while, with federal loans, you can be quite a few months past due before that happens. With private loans, the first thing that’s going to happen is that a collector will start calling, looking for their money. If this doesn’t work a third-party collection agency usually takes over. Luckily, the Fair Debt Collection Practices Act was enacted by the federal government, to protect American citizens from collection agencies and their sometimes abusive collection tactics.
On the other hand, the federal government can tap into your resources much more easily if you do go into default, whereas private creditors are forced to go through the court system if they want to collect your debt. Until such time as that actually happens, there’s nothing that they can do to touch your money. Your specific state’s statute of limitations covers defaults, and the average is six years. If you decide to sue and you lose your case, the creditor can garnish your wages, wipe out your bank account and put a lien on your house.
And the last rather scary note will end of part 1. In part 2 were going to look at all of the options that you have to deal with your student loan debt, lower your payments and, in some cases, get out from under them completely. Make sure to bookmark our website and come back here to see us soon for part two. Have a great day.