Deciding Whether to File for Bankruptcy: Consumer Debt Advice from NCLC
by John Rao, National Consumer Law Center


Thirteenth in a series from NCLC to help families in financial difficulty. Click here for a list linking to all the articles in this series.

Federal law provides the right to file bankruptcy for people with debt problems.
[Note: Bankruptcy is as old as our Government -- Bankruptcy is in the Constitution.]

This article explains

-- how bankruptcy can help you and when it may be the wrong solution for you.

-- the difference between chapter 7 and 13 bankruptcies,

-- how you know the best time to file for bankruptcy, and

-- what a bankruptcy will cost.

Importantly, the article corrects common misconceptions about bankruptcy.

While you should consider other options first, do not wait until the last minute to think about bankruptcy.
Important rights may be lost by delay.

What Bankruptcy Can and Cannot Do

Bankruptcy may make it possible for you to:

• 
  
• • Eliminate your responsibility for many of your debts and get a fresh start. When a debt is discharged at the close of a successful bankruptcy, you have no further legal obligation to pay that debt.
  
• 
  
• • Stop foreclosure on your house or manufactured home and allow you an opportunity to catch up on missed payments.
  
• 
  
• • Prevent repossession of your car or other property, or force the creditor to return property even after it has been repossessed.
  
• 
  
• • Stop wage garnishment, debt collection harassment, and other similar collection activities to give you some breathing room.
  
• 
  
• • Prevent termination of utility service or restore service if it has already been terminated.
  
• 
  
• • Lower the monthly payments on some debts, including car loans.
  
• 
  
• • Allow you an opportunity to challenge the claims of creditors who seek to collect more than they are legally entitled.
  

Bankruptcy, however, cannot cure every financial problem, nor is it an appropriate step for every individual.

In bankruptcy, it is usually not possible to:

• 
  
• • Eliminate certain rights of “secured” creditors. A “secured” creditor has taken some form of lien on your property as collateral for a debt. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process, but you generally cannot keep the collateral unless you continue to pay the debt.
  
• 
  
• • Discharge certain types of special debts, such as child support, alimony, most student loans, court restitution orders, criminal fines, and some taxes.
  
• 
  
• • Protect all cosigners on their debts. When a relative or friend has cosigned a loan and you discharge the loan in bankruptcy, the cosigner may still have an obligation to repay all or part of the loan.
  
• 
  
• • Discharge debts that are incurred after bankruptcy has been filed.
  

Understanding the Difference Between a Chapter 7 and a Chapter 13 Bankruptcy

Your rights are very different depending on whether you file a chapter 7 or a chapter 13 bankruptcy.

In a chapter 7 bankruptcy (called a “liquidation”), you eliminate most of your debts, but may lose your property other than “exempt” property—that is property the law says creditors cannot reach unless they take that property as collateral. For many families most of their property is exempt. In a chapter 13 case (called a “reorganization”), you keep all your property, and pay a portion or all of your debts in installments over a period of three to five years.


How a Bankruptcy Can Help You

An Immediate Stop of Foreclosures, Evictions, Repossessions, Utility Shut-Offs, Garnishments, and Other Creditor Actions.

Your bankruptcy filing will automatically and immediately, without any further legal proceedings, stop most creditor actions against you and your property, at least temporarily.


Your request for bankruptcy protection creates an “automatic stay,” which stops the continuation of or the start of repossessions, garnishments, attachments, utility shut-offs, foreclosures, evictions, and debt collection harassment. The automatic stay provides you time to sort things out and address your financial problems. A creditor cannot take action against you or your property without bankruptcy court permission. Some creditors seek such permission immediately; others never seek permission.


Permission to continue collection activity is rarely granted to unsecured creditors. Secured creditors can get “relief from the stay” in a chapter 7 case to continue foreclosure or repossession of their collateral. But an automatic stay will almost always continue to be in effect to protect you in a chapter 13 bankruptcy case as long as you are making payments on the secured debt.


If the creditor takes action against you despite the automatic stay, the creditor may have to pay you damages and attorney fees and the creditor’s actions against you can be reversed. For example, a foreclosure sale which is held in violation of the automatic stay can be set aside.


Discharge of Most Debts.

When you successfully complete a bankruptcy, there is a “discharge” (that is, a cancellation) of many of your unsecured debts, such as medical bills and credit card obligations, which eliminates all debt collection and other actions concerning those debts. Certain debts may not be discharged, such as most taxes, liens associated with many secured debts, alimony, child support, and debts you incurred after the bankruptcy case was started. After bankruptcy, you will continue to owe those debts. Student loans can be discharged only if you can prove that repayment will be an undue hardship on you and your family.


Bankruptcy cannot prevent creditors from taking your home or car unless you make sufficient payments on your mortgage or car loan. The bankruptcy though prevents these creditors from seeking additional cash from you after they take the collateral. For example, if you do not pay a car loan, the creditor can seize and sell your car, but the bankruptcy prevents the creditor from seeking additional payment from you if the car’s sale price does not cover the full amount of the debt.


Protection Against Wage Garnishment, Bank Seizures, and Enforcement of Judgment Liens.

After you file bankruptcy, creditors are prohibited from garnishing your wages or other income or your bank account. Bankruptcy even stops government agencies from recovering Social Security or other public benefit overpayments, so long as your receipt of the overpayment was not based on fraud.


Bankruptcy also is an effective tool to deal with some types of court judgments against you. If a court judgment for money does not create a lien against your property, that judgment debt can be discharged in bankruptcy. If the judgment does create a lien on your property, you may ask the bankruptcy court to remove the lien if it affects “exempt property,” and then the creditor can never touch that property.


Protection of Your Household Goods from Seizure.

Most families’ household goods are exempt from seizure—you keep them even in bankruptcy. This is the case even when a creditor has taken household goods as security for a loan, as long as that loan was not used to purchase those goods. If those household goods were taken as security to purchase those goods (such as when you purchase furniture on credit and the store takes the furniture as collateral for the loan), then see the next paragraphs on “secured creditors” where your rights are explained.


Added Flexibility in Dealing with Auto Loans, Mortgages, and Other Secured Creditors.

Bankruptcy can help deal with creditors who take your property as collateral for their loans, such as car loans and mortgage loans. You still have to make payments on these loans if you want to keep the collateral. However, bankruptcy does provide added flexibility in dealing with these debts.


A chapter 7 bankruptcy lets you keep your car by paying the creditor the lesser of what you owe on the loan or the car’s value. If your car is worth $1,000, and the remaining amount on your car loan is $3,000, you can keep the car by paying the creditor only the $1,000. The $1,000 payment usually must be made in a lump sum before the chapter 7 bankruptcy ends (usually after three to five months). Some creditors instead let you pay that amount in installments over a number of months even after the bankruptcy ends, but that is up to the creditor.


A chapter 13 bankruptcy gives you greater flexibility to keep your property. For example, if you are six months delinquent on a mortgage, filing a chapter 13 bankruptcy stops a threatened foreclosure and allows you to gradually catch up on the back-payments, over as many as three to five years. In some cases a chapter 13 filing also allows you to make lower monthly payments by extending the repayment period or lowering the loan’s interest rate. But you have to keep making payments until the loan is paid off.


Utility Terminations.

A bankruptcy filing stops a threatened utility termination and restores terminated service, at least for twenty days. To keep utility service beyond twenty days after the bankruptcy filing, you provide a security deposit (usually equal to approximately twice the average monthly bill) and keep current on new utility charges, but you need not pay the past-due charges incurred before the bankruptcy was filed. Often you can take sixty days to pay the deposit and some utilities may not require a deposit.


Driver Licenses.

If your driver’s license was or will be taken away because you have not paid a court judgment, such as one arising from an automobile accident, bankruptcy normally can discharge the obligation to pay the court judgment, and you then have a right to regain or retain the driver’s license.


The Best Time to File for Bankruptcy

It is often stated that bankruptcy is a “last resort” for financially troubled consumers. This is not really true.

In some cases, legal rights can be lost by delaying a bankruptcy. Be especially careful to get early advice about bankruptcy if you are concerned about saving your home or your car or protecting your bank account or wages from seizure.


For example, bankruptcy may not help you after your home is sold at a foreclosure sale or money in your bank account is seized. Bankruptcy can stop an eviction proceeding, but you have fewer rights in bankruptcy after a court has ordered you to be evicted. Act quickly to consider your bankruptcy rights.


While not ideal, all is not lost if you wait to the last minute before a foreclosure, repossession, or garnishment. Bankruptcies in an emergency can be filed with little preparation by filing only a brief petition, a statement of your Social Security number, and a list containing the names and addresses of your creditors. Additional forms must be completed and filed shortly thereafter.


But you must still complete an approved budget and credit counseling briefing before filing your bankruptcy. The counseling usually takes less than an hour, and can be done over the phone or over the internet.


On the other hand, if you are not facing immediate loss of property, but in the future you will incur new debts that you will not be able to pay, a bankruptcy filing should be delayed until you incur those new debts. New debts incurred after the bankruptcy filing are not discharged in that bankruptcy case—you will still be obligated to repay those new debts. If you file too soon and incur a lot of debt after the filing, you may be back to where you started from or even worse.


If you file a first bankruptcy too soon, you will find it more difficult to file a second bankruptcy to discharge the new debts incurred after you file the first bankruptcy. After you first file a chapter 7 bankruptcy, you have to wait eight years to file another chapter 7 case. There is more flexibility to file a chapter 13 case after first filing a chapter 7 bankruptcy. Thus it is a good idea to wait to file for bankruptcy until your debts have peaked.


If you decide to wait to file bankruptcy, avoid the temptation to go on expensive vacations or credit card shopping sprees that you do not intend to repay. In a chapter 7 bankruptcy, debts incurred in this way can be declared non-dischargeable. On the other hand, pre-bankruptcy expenses for medical care and other essentials are rarely challenged. Similarly, it may make sense before filing bankruptcy to purchase in installments needed medical or automobile insurance.


The Cost of Filing Bankruptcy

Unfortunately, it is expensive to file bankruptcy. Bankruptcy is a legal proceeding with complicated rules and paperwork. You may want to get professional legal help, especially if you hope to use bankruptcy to prevent foreclosure or repossession. Most bankruptcy attorneys provide a free consultation to help you decide whether bankruptcy is the right choice. If the attorney takes the case, the attorney will expect to be paid, unless he or she works for a nonprofit legal services office or is doing the bankruptcy pro-bono.


You also have to pay the court a bankruptcy filing fee—$310 for chapter 13 or $335 for chapter 7. The fee can be paid in four installments over 120 days (or 180 days with court permission). You can also ask the court to waive the filing fee in a chapter 7 case if your household income is less than 150% of the official poverty guidelines (for 2018, $24,690 for a family of two or $37,650 for a family of four). No waiver is allowed in a chapter 13 case.


In a chapter 13 case, you pay your debts over time, and you usually have to pay the trustee handling your payments a 10% commission on each payment. While this can add up, you will be paying far lower interest on your debts in a chapter 13 plan than if you had not filed bankruptcy. Even more significantly in a chapter 13 plan, you may only have to repay a small percentage of what you owe on most of your unsecured debts.


Common Misconceptions About Bankruptcy

When You File Bankruptcy Typically You Will Lose Little or None of Your Property.

People are wrong who believe that a bankruptcy filing results in the loss of most of their property. Everyone who files bankruptcy gets to keep some of their possessions, and most people get to keep all of them.


No matter the type of bankruptcy you file, unless property is collateral for a loan, you get to keep all your property that is protected by “exemption” laws. Exemption laws typically protect clothes, appliances, furniture, jewelry, and often even your car and home.


An exemption law may state that you get to keep property that is worth less than a certain amount. What that property is worth is based not on how much the property cost, but rather on your “equity” in the property: the amount that the property is worth in its present condition minus how much you owe on a loan for that property.


For example, if an exemption law protects a $2,000 motor vehicle, this dollar amount applies to $2,000 of your equity in the car, not to the total value of the car. If your car has a total value of $7,000 today with a $5,000 car loan balance, you have $2,000 in equity in the car. In this scenario, you can fully protect a $7,000 car with the $2,000 exemption. You will still have to repay the $5,000 car loan in the bankruptcy or the auto lender will take the car, but you won’t lose the car to pay your other creditors.


What property and the amount of that property that is exempt varies widely from state to state and the application of exemptions in bankruptcy can be complex, particularly if you have moved within the last two years to a different state or bought a home within the last 40 months. You should discuss what property is exempt with a bankruptcy attorney, but the general rule of thumb is that, for most consumers filing bankruptcy, much of their property is exempt.


What property you keep also depends on the type of bankruptcy you choose—a chapter 7 or a chapter 13. In a chapter 7 case, you keep your exempt possessions, but other property may be sold, with the money distributed to pay your creditors. In a chapter 13 case, you keep all your property by paying their nonexempt value over time from future income under a plan approved by the bankruptcy court. If you have very valuable property, it might be sold in a chapter 7 bankruptcy, but you keep it if you pay its value to your creditors over a number of years in a chapter 13 plan.


The Effect of Bankruptcy on Your Credit Report.

The effect of a bankruptcy on your credit report is of understandable concern. Most often, you should not worry about bankruptcy making it harder for you to obtain credit. If you are delinquent on a number of debts, this already appears on your credit record. A bankruptcy is unlikely to make your credit rating any worse, but instead may make it easier for you to obtain future credit.


New creditors will see that old obligations have been discharged in the bankruptcy and that you have fewer other creditors competing with them for payment. Creditors also recognize that you cannot receive a second chapter 7 bankruptcy discharge for another eight years.


After bankruptcy, your credit file will also list the outstanding balance as zero dollars for each of your debts. The credit file will list the fact that you filed bankruptcy and that certain debts at one time were delinquent, but creditors are most interested in what you owe now on each debt. That your credit report shows that you owe nothing on a debt improves your credit standing.


After your bankruptcy is complete, check your credit report to make sure all the debts you discharged in bankruptcy are listed as now owing zero dollars. File a dispute with the credit bureaus if your discharged debts continue to be listed as having a balance owed.


Bankruptcy also often will enhance the stability of your employment and income. Wage garnishments, continuous collection calls, car repossessions, telephone disconnections, and other consequences of an unaffordable debt burden are eliminated, and this should help you find and hold steady employment. Steady income is key to creditworthiness.


Bankruptcy will make it more difficult for you to obtain a new conventional mortgage to purchase a home. Even then, most lenders will not hold the bankruptcy against you if you re-establish a good credit reputation for two to four years after your bankruptcy.


After bankruptcy, some new lenders may demand collateral as security, ask for a cosigner, or want to know why bankruptcy was filed. Other creditors, such as some local retailers, may not even check your credit report.


Bankruptcies stay on your credit record for ten years from the bankruptcy filing, while your debts are usually only reported for seven years from their delinquency. If delinquencies on your debts are five or six years old, bankruptcy will not help your credit record. The debts will be deleted from your credit report within a year or two, while the bankruptcy will stay on your record for ten years.


If you file bankruptcy, you usually do not need to go to court, unless something out of the ordinary occurs.

You will have to attend one meeting with the bankruptcy trustee (not with a judge). Creditors are invited to that meeting but rarely attend. In the rare case that you do receive a notice to go to court, it is important that you go and also check with your attorney if you have one. Before your case is closed, you must also take a course in personal finances, which will last for approximately two hours.


The Effect of Bankruptcy on Your Reputation in the Community.

Most people find their reputations do not suffer from filing bankruptcy. Bankruptcies are not generally announced publicly, although they are a matter of public record. It is unlikely that your friends and neighbors will know that you filed bankruptcy unless you tell them.


However, especially in a small town, where debts are owed to local people, reputational issues connected with filing bankruptcy may arise. In such a situation, weigh possible embarrassment and damage to reputation against bankruptcy’s potential advantages. If you believe that your reputation in a small town is a concern, you may choose to voluntarily pay selected debts after bankruptcy, but you cannot leave selected creditors out of the bankruptcy process entirely.


Feelings of Moral Obligation.

Most people want to pay their debts and make every effort to do so if payment is possible. If bankruptcy is the right solution to your financial problems, you should balance these feelings of obligation with the importance of protecting your family.


Bankruptcy is a legal right. A provision concerning bankruptcy is even contained in the United States Constitution. Big corporations like Kmart, American Airlines, Chrysler, and Macy’s, and famous people like Toni Braxton, Tammy Wynette, Larry King, Mickey Rooney, Henry Ford, and Walt Disney have all chosen to file bankruptcy.

The book of Deuteronomy states: At the end of every seven years thou shalt make a release. And this is the manner of the release: every creditor shall release that which he has lent unto his neighbor and his brother; because the Lord’s release hath been proclaimed. (Deut. 15:1–2.)
Most importantly, during hard times, bankruptcy may be the only way to provide your family with food, clothing, and shelter. This book explores alternatives to bankruptcy, and these should be considered carefully. But it may be that bankruptcy is your best or only realistic alternative.


Potential Discrimination After Bankruptcy. The federal bankruptcy law offers you protection against being discriminated against because you have filed for bankruptcy. Government agencies, such as housing authorities and licensing departments, cannot deny you benefits because of a previous bankruptcy, including debts discharged in bankruptcy that were owed to those agencies. Government agencies and private entities involved in student loan programs also cannot discriminate against you based upon a bankruptcy filing.


Employers are not permitted to discriminate against you for filing bankruptcy. However, for some sensitive jobs which involve money or security, your bankruptcy may be considered evidence of financial problems which could be detrimental to your work. Bankruptcy law does not prevent discrimination by others, including private creditors, deciding whether to grant you any new loans.


When Bankruptcy May Be the Wrong Solution

There are at least seven situations in which bankruptcy may not be the right option for you:

1. 1) If all your assets and income are exempt, then you are “collection-proof.”
   (See a previous article in this series: Wage Garnishments and Bank Account Seizures for more information about what it means to be “collection-proof.”) In that case, most creditors can do virtually nothing to harm you even if you don’t filing bankruptcy. At which point, there may not be a compelling reason to file for bankruptcy. Waiting until you are no longer collection-proof is generally more prudent than filing right away, unless you are concerned with a home mortgage, car loan, or other secured loan.
   
2. 
   
3. 2) The debts at issue are secured by your property—such as home mortgages or car loans—and you do not have sufficient income to keep up payments while also catching up on past-due amounts. Bankruptcy may not help you when the long-term expense of keeping your home or car exceeds your long-term income.
   
4. 
   
5. 3) You have valuable assets that are not exempt in the bankruptcy process and you do not want to lose these assets. A chapter 13 filing may still help if you can afford the necessary payments.
   
6. 
   
7. 4) Your main reason for filing bankruptcy is to discharge a student loan, alimony or child support obligations, court restitution orders, criminal fines, or some taxes. These obligations are difficult if not impossible to discharge in bankruptcy.
   
8. 
   
9. 5) You have only a few debts and strong defenses for each. Instead of filing for bankruptcy, you can raise these defenses aggressively. Usually the disputes can be settled out of court in an acceptable way. If they are not settled, you can use bankruptcy later.
   
10. 
    
11. 6) Because of a prior bankruptcy, you cannot receive a discharge in a chapter 7 bankruptcy. However, in most cases, a chapter 13 petition can still be filed.
    
12. 
    
13. 7) You can afford to pay all of your current debts without hardship.
    

library.nclc.org
Student Loan Repayment Rights: Consumer Debt Advice from NCLC (National Consumer Law Center)
by Joanna Darcus

Click here for a list linking to all the articles in this series.

This article explains rights to cancel, reduce, or delay federal student loan payments. Also covered are ways to get out of default short of paying past due amounts and details about the government’s collection methods. Finally the article addresses private student loans.


Free information to help you with all types of student loan problems is available at NCLC’s website, www.studentloanborrowerassistance.org. NCLC’s Student Loan Law has even more detailed information.


Most student loans are backed by the federal government. The federal government has extraordinary powers to collect defaulted student loans if you don’t pay. It can seize tax refunds, deny you new federal student loans and grants, garnish a percentage of your wages without a court order, charge you very large collection fees, and even take a portion of your Social Security benefits. To make matters worse, there is no time limit for collection on federal student loans. The government can keep trying to collect for twenty, forty, or even more years.


Consequently, federal student loans require your immediate attention, both because of the federal government’s special collection powers and because of the special rights you have to cancel, reduce, or delay your payment obligations. However, these special rights require you to take action to request them—you cannot wait for the government or the loan collector to offer these options to you.


These special collection tactics and student rights apply only to federal student loans and not loans made by your school, a bank, or another financial institution without any backing from the federal government. Those are called private student loans. How you deal with private student loans will differ greatly from how you deal with federal student loans. Private student loans are discussed at the end of this article.

First Identify What Kind of Loan You Have

Your rights and strategies will vary depending on the type student loan you have. Access information about your federal loans at the Department of Education’s National Student Loan Data System (NSLDS), by going to www.nslds.ed.gov or calling 800-4-FED-AID, TDD: 800-730-8913. When first using the online system, create a user name and password, supply an e-mail address, and provide other identity information. The NSLDS will provide your approximate loan balance, the type loans you have, who is servicing those loans, and other loan details.


You can also determine what type of loan you have by checking your loan agreement papers. If you do not have copies, request them from your loan holder. If the loan is federal, the name of the federal loan program will be written at the top of the loan document and also on the loan application and billing statements. Your credit report will also have information about your loans.


Direct Stafford Loans are the most common student loan. Since 2010, nearly all new federal student loans are Direct Loans, made directly from the federal government to you, with the school’s assistance.


Federal Family Education Loan (FFEL) Stafford Loans are similar to Direct Stafford Loans, but were given out by banks or other financial institutions, administered by state and nonprofit guaranty agencies, and ultimately backed by the United States. Before 2010, many student loans were made under the FFEL program (also known as guaranteed loans), and many borrowers are still making payments on these loans or are subject to collection on old FFEL loan debts.


PLUS Loans are loans for parents to help finance their children’s education and also for graduate and professional students. Since 2010, PLUS loans have been issued under the Direct Loan program, but were mostly FFEL loans before that.


Consolidation Loans allow you to combine one or more federal loans into a new loan that has different, hopefully better, terms—now issued only through the Direct Consolidation Loan program though some borrowers continue to repay old FFEL Consolidation Loans.


Perkins Loans were made directly from the school you attended. If you stop paying the school, the loan may eventually be turned over to the U.S. Department of Education for collection. Perkins Loans have a fixed interest rate of 5%.


Private Student Loans are increasingly offered to students. These loans have no government involvement but are offered by banks or other private institutions. If your loan is not listed in the NSLDS, it is probably not a federal loan, unless it is a very old federal loan. Other ways to identify a private student loan include:

1. If the loan was made since 2010 and has the name of a bank on it, it is a private loan.


2. If the interest rate is 10% or higher, it is most likely a private loan.


3. If there is a co-signer on a loan, it is probably a private loan.


4. If, when you took out the loan, you received a disclosure statement that looks somewhat like the statement you get when you take out a car loan, then it is probably a private loan.

Most of the discussion in this article applies to federal loans only. A separate section at the end of the article discusses private student loans.


Rights to Cancel Your Federal Student Loan

If there were serious problems with the school, if you are disabled (or have passed away), even if you are in default on the loan, you may be able to apply to have your federal loan discharged—that is cancelled—by submitting paperwork to your loan servicer, debt collector, or directly to the Department of Education. This is an administrative process. Ask whoever is holding your loan for the appropriate discharge request form. The forms are also available at https://studentaid.ed.gov. Be prepared to meet resistance and delay, insist on your rights, and consider seeking assistance from an attorney. You may also have rights to cancel the debt by filing bankruptcy.


A successful administrative discharge may not only completely wipe out the current loan, but may allow you to get back money you paid on the loan and any money that was taken from you through tax refund intercepts, wage garnishment, or other collection methods. In some cases, the government is also required to delete negative references on your credit report.


This section summarizes your rights to cancel your loan. More information is available from the https://studentaid.ed.gov, from NCLC at www.studentloanborrowerassistance.org, and NCLC’s Student Loan Law.


Closed School Discharge. If your school closed while you were enrolled or within 120 days of your leaving the school, your loans can be discharged. (In a few cases, the 120-day period may be extended.)


Unpaid Refund Discharge. You are eligible to discharge all or a portion of a loan if you left school and the school failed to pay you a refund you were owed.


Borrower Defense to Repayment Discharge. You may seek to discharge all or a portion of a loan if your school misled you or otherwise violated state law regarding your loans or education. You should provide information identifying the law that your school violated and evidence showing the violation.


False Certification Discharge. A false certification discharge application form is available if any of the following happened to you (or to the student, if you’re a Parent PLUS borrower):

• • At the time of enrollment, state law disqualified you from getting a job in the occupation for which you were being trained (for example, you were enrolled in a truck driving program even though you had a physical disability that prevented you from obtaining a truck-driving license).


• • You did not have a valid high school diploma or GED when you went to the school, and your school did not ensure that you met the applicable alternative financial aid eligibility criteria (such as through an ability-to-benefit test).


• • The school forged your name on the loan papers or check endorsements, and you never went to school for the times covered by the forgery.

Disability Discharge. You can discharge your loan if the Department of Veterans Affairs, the Social Security Administration, or your physician certifies that you have a total and permanent disability. Parents with PLUS Loans may apply for discharge based on their own disabilities, not those of their child. If two parents have a PLUS Loan and only one becomes disabled, the other must still repay the loan.


The first step to apply is to notify Nelnet (a company hired by the Department of Education), by calling 888-303-7818 (8 a.m. to 8 p.m. EST, 7 days a week), e-mailing DisabilityInformation@Nelnet.net, or applying at www.disabilitydischarge.com. You can designate a representative to apply on your behalf, but you first must fill out the representative designation form available at www.disabilitydischarge.com. Additional details about applying are available there as well.


Death Discharge. Your estate will not have to pay back your student loans. Your estate should submit an original or certified copy of the death certificate to the loan holder. The death of both parents with a PLUS Loan (assuming both took out the loan) is also grounds for the “death discharge,” but not the death of only one of two obligated parents. A parent can also apply for discharge of a PLUS Loan if the student for whom the parent received the loan dies.


Other Grounds for Loan Cancellation or Forgiveness. The Public Service Loan Forgiveness program allows Direct Loan borrowers employed in certain occupations to discharge any remaining loans after making 120 qualifying payments (the equivalent of ten years of payments). Certain teachers who have taught for five consecutive years are also eligible for at least partial loan forgiveness. Perkins Loans also may be partially or completely cancelled for borrowers who work in certain fields. Be sure to review the details about all of these programs at https://studentaid.ed.gov.


Bankruptcy. It is very difficult, but not impossible, to discharge a student loan in bankruptcy. You must prove that repaying the loan would cause an “undue hardship” for you and your dependents. Courts generally interpret this to mean that you must have serious financial problems which are likely to persist for reasons beyond your control. It is usually better to ask the bankruptcy court to make this determination at the time of the bankruptcy filing, but if you fail to do so, the bankruptcy court can make that determination later when collection attempts on the student loan are renewed.


How to Reduce or Delay Your Payments

If loan discharge, cancellation, or forgiveness is not currently available to you, the government also offers options to lower your monthly payments, so you don’t default. Even if you do default, you can get out of default and qualify for one of these lower payment plans (see the section on Getting Out of Default later in this article).


The typical federal student loan repayment plan, called the Standard Repayment Plan, generally gives you up to ten years to repay your student loan (up to thirty years for consolidation loans). Other repayment plans may lower your payments (at least initially). These plans do not reduce your total obligation, but they let you pay it off more slowly. This means that additional interest will be added to the loan, and you could end up paying more interest in exchange for more affordable monthly payments.


Extended Repayment Plan. This option allows you to extend repayment over a longer period (usually no more than twenty-five years), thus lowering your monthly payment. These plans are generally available only if you have loans totaling more than $30,000.


Graduated Repayment Plan. Payments start out low and increase every two years. In most cases, however, the loan still must be paid over a ten-year period.


Income-Sensitive Repayment Plan. If you have an FFEL and do not want to or cannot consolidate into a Direct Loan, you best option is one of the income-driven repayment plans (discussed below) or possibly an income sensitive plan. Income-sensitive repayment allows for reduced monthly payments due to your financial circumstances. Payment is calculated based on your total gross income, rather than your discretionary income. There is no loan forgiveness under this plan even after several years of repayment.


Alternative Repayment Plan. If no other plan is affordable, Direct Loan borrowers who have “exceptional circumstances” can submit documentation to apply for a repayment plan that is affordable. High medical expenses or private student loan payments could be among the expenses you provide to your loan servicer. There is no loan forgiveness under this plan.


Income Driven Repayment Plans. In recent years, the government has created a range of income-driven repayment (IDR) plans. These plans calculate your monthly payment after considering your income, rather than basing the plan on your loan balance. By lowering monthly payments—in some cases to zero—these plans help you avoid default, which prevents tax refund intercepts, wage garnishment, seizure of benefits, and high collection costs.


For these IDR plans, your loan servicer or lender will check with you every year to determine your income. If you fail to respond you will be dropped from the payment plan and your monthly payment will usually increase by a lot! In some instances, your balance continues to grow even though you make monthly payments, as interest will continue to be added to your loans. However, the government may pay a portion of the interest, depending on your loan type and repayment plan. Also, if you stay on an income-driven repayment plan for twenty or twenty-five years (depending on the plan), any remaining debt is forgiven, though some borrowers may owe taxes because of the forgiven debt.


Brief descriptions of these plans follow below. Detailed information about each of these repayment plans and a calculator to compute your payment amounts is available at www.ibrinfo.org or https://studentloans.gov. Pay special attention to which loan types qualify for which of these repayment plans. FFEL and Parent PLUS borrowers can only access some of these plans.


Pay As You Earn (PAYE) Repayment Plan. This is often the best option for borrowers who qualify, particularly if you would otherwise have high student loan payments relative to your income. PAYE is only for those who had no student loan obligations as of October 1, 2007, and then received a Direct Loan disbursement on or after October 1, 2011. You pay 10% of your “discretionary income”—the amount by which your adjusted gross income exceeds 150% of the poverty line for your state and family size.


In 2018, 150% of poverty was $1,517/month for a one-person household, $2,057/month for a two-person household, and $3,137/month for a four-person household. (The numbers vary in Hawaii, Alaska, or with different family sizes.) For example, if your monthly income is $120 above 150% of the poverty line, you only pay $12 a month.


If you are married, your spouse’s income is included in this calculation only if you file a joint tax return. Your monthly payments can’t go higher than your payments on the Standard Repayment Plan. After twenty years of payments on PAYE, your remaining student loans are forgiven.


Revised Pay As You Earn (REPAYE) Repayment Plan. REPAYE incorporates many of the benefits of PAYE and makes them available to borrowers no matter when they took out their loans. Under REPAYE, you pay 10% of your discretionary income toward your student loans. However, if you are married, then your spouse’s income is included in this calculation even if you file separate tax returns. (The only exception is for spouses who are separated and borrowers who cannot reasonably access their spouse’s income information.)


Under the REPAYE plan, there is no cap on your monthly payment so that higher income borrowers could end up with payments higher than on the Standard Repayment Plan. If you only have loans from undergraduate studies, the remaining loan is forgiven after twenty years of payments. Forgiveness for loans from graduate or professional school is not available until after twenty-five years of payments.


Income-Based Repayment (IBR) Plans. There are different IBR plans based on how recent your student loans are. If, on July 1, 2014, you had a zero balance on any loans and then took out a Direct Loan after July 1, 2014, your rights are almost exactly the same as under a PAYE plan. Because PAYE offers more flexibility in switching plans, you may choose to use PAYE (or REPAYE) instead of IBR. However, PAYE and REPAYE are not available for FFEL loans, but those loans are eligible for IBR.


For older loans, IBR is not quite as generous as IBR is for newer loans. Your payments are 15% of the difference between your income and 150% of the poverty line, and forgiveness occurs after twenty-five years. In either case, as with PAYE, your spouse’s income is only included in the payment calculation if you file joint tax returns.


Income-Contingent Repayment (ICR) Plan. ICR usually requires higher payments than PAYE and REPAYE. But it is essentially the only income-driven repayment option for Parent PLUS borrowers. If you have an FFEL Parent PLUS Loan, you can consolidate it into a Direct Consolidation Loan to become eligible for ICR. The calculators at https://studentloans.gov estimate what your monthly payment will be on ICR.


Deferments. If you cannot manage your monthly payment using one of the repayment options listed above, you may choose to seek a deferment instead. A loan deferment lets you temporarily delay repaying your loan, usually for up to a year, though sometimes longer. You can often renew the deferment if it ends, but if not, you must resume making payments. Deferments are not available if you are already in default, typically defined as missing nine payments. To benefit from deferment, you must first get out of default, as described later in this article.


Benefits from deferment depend on whether your loan is subsidized by the government. Subsidized loans are given out based on financial need. As of July 2012, graduate and professional students were no longer eligible for new subsidized loans.


For subsidized loans, the government makes interest payments for you during the deferment period. Your loan balance will be no higher after the deferment period than before. When you defer an unsubsidized loan or a PLUS Loan, you will later have to pay back the interest that accrued during the deferment period. If you can afford it, you should consider paying the interest while you are in a deferment period.


You have a legal right to a loan deferment under specified conditions. For most loans that you got after July 1, 1993, the available deferments include:

• • Unemployment deferments (for up to three years);


• • Economic hardship deferments (granted one year at a time for up to three years);


• • In-school deferments for at least half-time study;


• • Graduate fellowship deferments;


• • Rehabilitation training program deferments;


• • Military service deferments (there is no time limit, but eligibility ends 180 days after demobilization or the end of active duty service); and


• • Post-active duty deferments for borrowers who are enrolled in school when they are called to active duty and plan to re-enroll after their service is completed.

FFEL and Perkins Loans have somewhat different deferment rules than those for Direct Loans.


Forbearances. If you cannot qualify for a deferment, you can still request loan “forbearance,” meaning you do not have to pay for a while, and no adverse action will be taken against you during the forbearance period. Even for a subsidized loan, the government does not pay interest for you. You will eventually have to repay the full loan amount and all accrued interest. In some cases, you should be able to get a forbearance even if you’re already in default. This will not get you out of default without further action.


In some circumstances, you have a legal right to a forbearance. For example, you have a right to forbear an FFEL or Direct Loan if your total student loan payments exceed 20% of your income even if you are many months delinquent. There are limits to how many times you can automatically get this and most other forbearances. If you don’t have a right to a forbearance, loan holders still may grant you one, especially for health or other personal problems that affect your ability to make your monthly payments.


What to Expect If You Are in Default on Your Student Loan

The government has a number of aggressive collection tactics it can take if you are in default on a federal student loan, which usually means you have not made payments for at least nine months. The next section describes methods to avoid those tactics completely by getting your loan out of default status.


Denial of New Student Loans and Grants. If you’re in default, the government can deny you new federal student loans and grants.


Your Credit Report. Most student loan defaults appear on your credit report for seven years. Perkins Loans may be reported until repaid in full, and then for seven years from the date of default.


Aggressive Collection Agency Contacts. Most student loan debt collection is by private agencies hired by the government or other loan holders. Private debt collectors are likely to be aggressive and to not inform you of options that would help you out, such as loan cancellation rights or affordable repayment plans. In general, you have the same rights to deal with student loan debt collectors as with any other debt collector—described in a prior article in this series. Complain about problems with student loan debt collectors to the Department of Education at https://feedback.studentaid.ed.gov/ and the Consumer Financial Protection Bureau at https://consumerfinance.gov/complaint/.


Collection Fees. When you are in default, a large portion of anything you pay to a collection agency on the loan is applied to high collection fees and not to pay off your loan—fees can be as high as 25% of your payment (less in some cases). Fees on Perkins Loans can be as high as 40%.


Tax Refund Offsets. When in default, the government can intercept your tax refund, including your earned income tax credit. The only sure-fire way to avoid this is not to have a tax refund due by lowering your withholding or any estimated tax payments you make. If your joint tax refund is seized, your spouse can recover some of the amount by filing IRS Form 8379, a simple form available at www.irs.gov.


You have the right to be notified before your tax refund is taken. You can contest the taking by checking appropriate boxes on the form (for example, the school closed or the school failed to give you a refund), by returning it immediately and by asking for a hearing. Send the form back return receipt requested as proof that you sent it. Do this every year that you get a notice. If you receive notice only after your tax refund is offset, you can contest the offset after the fact.


Wage Garnishment. When in default on a federal student loan, the government can garnish part of your wages without first obtaining a court judgment. The first $217.50/week of “disposable pay” (basically your take-home pay) is protected from garnishment. If your disposable pay is less than $256/week, the government can take the amount that exceeds $217.50/wk. If you make more than $256/week, it can take 15% of the pay.


There are a number of ways to stop student loan garnishments:

1. Request a hearing and explain why you think you need not repay the loan.


2. Ask for a repayment agreement, especially before the wage garnishment begins.


3. Explain you lost your old job against your wishes and have not been continuously employed in a new job for a full year.


4. If you enter a rehabilitation plan (discussed later in this article), the garnishments stop after your fifth on-time rehabilitation payment.

Federal Benefit Offsets. The government can seize part of certain or your government benefits, including Social Security, Social Security Disability, certain railroad retirement benefits, and Black Lung Part B benefits. Some benefits are exempt from seizure, including Supplemental Security Income (SSI), Veterans benefits, and Black Lung Part C. To find out which benefits can be seized or are protected, go to www.fms.treas.gov.


For benefits the government can seize, the government cannot touch the first $750 a month. If your monthly benefits are under $832 a month, it can seize the amount that is left after $750 is protected. If your benefits are over $832 a month, it can seize 15% of your benefits.


You should also receive a notice warning you that your benefits are going to be taken, with information about your right to request a hearing with the agency that is collecting the money. Request a hearing if you think you have defenses to repayment or if you are facing financial hardships.


Lawsuits. There is no time limit for the government to sue you to collect on federal student loan debt. If you are sued, you may have defenses and you can resolve the lawsuit by getting out of default (as discussed below) and resuming payments, or by applying for loan cancellation or discharge.


License Revocations. Some states allow professional and vocational boards to refuse to certify, certify with restrictions, suspend, or revoke your professional or vocational license, or even fine you if you default on a state-guaranteed student loan. Some states may allow for suspension or revocation of your driver’s license, too. Some states also apply these policies if you are in default on federal student loans.


Getting Out of Default

As described in the prior two subsections, after you default on your federal student loan by missing nine months of payments, you may be subjected to harsh collection tactics and lose access to some of the most generous repayment plans and deferments. It is greatly to your advantage to get out of default. One way is to cancel the loan as described earlier in the article. Three other ways are described below, but these do not happen automatically—you must press for your rights and initiate the request.


Reach a Settlement to Pay Off Your Loan Balance. You can get out of default by negotiating a settlement with your loan holder or the Department of Education to pay a lesser amount to pay off the loan. It can be difficult to negotiate a “good” deal, and you probably will need a large, lump-sum amount to offer. Get any settlement in a writing that confirms that you no longer owe anything, then pay on time, and request a satisfaction letter as proof of your payment in case someone attempts to collect further from you. Consult with a tax professional about any tax liability from your settlement.


Loan Consolidation. Loan consolidation is taking out a new federal Direct Loan that repays at least one Perkins, FFEL, or Direct Loan. Your consolidation loan, being new, is not in default. Being a Direct Loan, it is eligible for plans to reduce your payments not available to those with FFEL or Perkins Loans. Consolidation can also simplify repayment if you currently submit payments to multiple servicers.


You can apply online and need not deal with debt collectors or servicers. You can consolidate your loans only once, although there are a few exceptions to this, such as if you are adding new loans that were not included in the first consolidation. Consolidation is not an option if your wages are presently being garnished to repay your student loans. (You can still consolidate if the government is taking part of your Social Security benefits or other income, though.) If you consolidate loans in default, collection costs may be added into the consolidation loan, increasing your loan balance by as much as 18.5%. Since the consolidation is a new loan, you may lose the right to raise defenses you have on the old loans.


You must either pay the consolidation loan through enrollment in an income-driven repayment plan (such as PAYE, described above) or by first making three consecutive reasonable and affordable monthly payments. Because you need to do only one or the other, do not believe a collection agency that tells you that you have to make three payments on your old loans before you can consolidate. Consolidation also extends your repayment term and, therefore reduces monthly payments if they are not otherwise reduced through enrollment in a payment plan that takes your income into account.


Distinguish Direct Consolidation Loans from private loan consolidation products. It is dangerous to consolidate federal loans into a private consolidation loan. If you consolidate into a private loan, you lose the rights you have under the federal loan program, including rights to cancel or reduce your loan payments. Private lenders may even offer you bonuses if you agree to consolidate with them, but this may not be the right choice for you. Read the fine print!


More information about consolidation loans can be found in NCLC’s Student Loan Law, at www.studentloanborrowerassistance.org, by calling 800-557-7392, or by visiting www.studentloans.gov.


Loan Rehabilitation. This section explains how to get out of default by “rehabilitating” your Direct or FFEL Loan—the rules are slightly different for Perkins Loans. Loan rehabilitation requires you make nine payments within twenty days of the due date during a period of ten consecutive months. After five consecutive payments, wage garnishments stop. If needed, call the collection agency or your loan holder to remind them to stop the garnishments. Once you make six consecutive payments, you re-establish eligibility for new federal student loans and grants. You must complete all nine payments, and then a Direct Loan gets out of default. For an FFEL Loan, the loan holder must also sell your defaulted loan to a new lender. If you don’t make all of your payments, you have to start the rehabilitation process all over again.


Rehabilitation payments need not be at your old payment amount, but can be at a “reasonable and affordable” amount. Request lower payments and the collector should offer payments equal to 15% of the difference between your income and 150% of the poverty line. In 2018, 150% of poverty was $1,517/month for a one-person household, $2,057/month for a two-person household, and $3,137/month for a four-person household. (The numbers vary in Hawaii, Alaska, or with different family sizes.) For example, if your monthly income is $120 above 150% of the poverty line, you only pay $18 a month.


If the amount is still too high, try to negotiate a lower amount based on your income and expenses. The minimum monthly payment for rehabilitation is $5—even if your income is below 150% of the poverty line, you still have to pay $5 each month during rehabilitation.


After a successful rehabilitation, you are no longer in default, the default notation is removed from your credit record, and a new repayment schedule is established, but you are still paying on the same loan. You should have access to all of the flexible and income-driven repayment plans that fit your loan type, and you regain eligibility for deferments and forbearances you have not exhausted. The amount of your rehabilitated loan increases as much as 16% to reflect collection costs. Once you rehabilitate your loan, you will not be able to do it again if you end up back in default.


Pros and Cons of Consolidation vs. Rehabilitation. Weigh the pros and cons between consolidation and rehabilitation; do not be pressured by a debt collector to choose one or the other. Make sure that you can afford to make the new payments for the option you choose so that you don’t end up back in default.


Consolidation gets you out of default as soon as the loan is consolidated; rehabilitation requires nine payments in ten months; and for FFEL loans, there must be a buyer for your loan. Consolidation removes all loans from default with the one consolidation; rehabilitation requires you to separately deal with each loan. If you have an FFEL or Perkins Loan, only consolidation into the Direct Loan program gives you access to some of the newer income-driven repayment plans. Consolidation allows you to apply online; rehabilitation requires you to work out a payment amount with debt collectors. When you consolidate, you choose your new servicer, but you don’t have that option when you rehabilitate a loan.


Rehabilitation’s main benefit is that if you successfully complete the rehabilitation process, the default notation on your credit report is erased, but any other negative information still remains. After consolidation, the credit report notes that you had a defaulted loan for a period of time, but that the loan is paid in full. If you have claims and defenses concerning your federal student loan, you may lose the right to raise them after consolidation, but not after rehabilitation.


More Help with Federal Student Loan Problems

Free information to help you with all types of student loan problems is available at NCLC’s website, www.studentloanborrowerassistance.org. NCLC’s Student Loan Law has even more detailed information. The best Department of Education website to use for general information is https://studentaid.ed.gov and for information about your loans or how to manage your loans, you can use https://studentloans.gov. Also helpful is www.ed.gov. Useful publications to download from these websites, available in English and Spanish, include Do You Need Money for College?, The Guide to Federal Student Aid, and Federal Student Loans: Basics for Students.


Borrowers can submit problems online at https://feedback.studentaid.ed.gov to the Department of Education’s Federal Student Aid Ombudsman or by calling toll-free 877-557-2575. Many guaranty agencies and private lenders also have ombudsman or customer advocate units. Another source to receive complaints is the Consumer Financial Protection Bureau at https://consumerfinance.gov/complaint. You can also contact your state or local consumer protection agency to make a complaint or seek assistance.


Private Student Loans

Dealing with Your Private Student Loans. Private student loan payments are lower priority than paying your mortgage, rent, utilities, car loan, or even your federal student loans. Private student loans should be treated like your credit card or medical debt—the only difference being that, as with federal student loans, it is very difficult to discharge most private student loans in bankruptcy.


Private student loan lenders or collectors may be willing to negotiate because they do not have as many collection tools as the federal government. They cannot intercept your taxes, seize your Social Security benefits, seize your wages before going to court, or deny you future government loans. A defaulted private loan may, however, show up on your credit report.


Private lenders often hire collection agencies. You have the same rights as with any other debt to fight back against any collection harassment or abuse.


If a number of years have passed since you last made a payment or requested a deferment or forbearance, consult an attorney before you contact the lender or start making payments again. A “statute of limitations” may have already expired on the loan, meaning the lender can no longer sue you on the debt. Payment now or even a new promise to pay may suddenly give the lender the right to sue you for years into the future.


It can be complicated to determine the number of years before the statute of limitations prevents suit on a debt, hence the need for legal help. In many places, the number of years is six after your default, but in some states and for certain loans it may be only three or four years, or even as long as twenty. The attorney will want to see a copy of the loan agreement to help determine this. If you do not have a copy, request one from the lender whose contact information may be on collection letters or your credit report. If you reach out to the lender, avoid making payments or promises to repay, and don’t contact the lender unless you are prepared for them to follow up with collection efforts.


Private student loans do not have the same flexible repayment, loan cancellation, and other borrower protections that federal student loans have, but there may be steps you can take to help. See if the loan agreement says anything about relief if you are having trouble making payments. If the statute of limitations has not expired, you may choose to negotiate for lower payments or even principal reduction.


The borrower or the borrower’s estate will generally be liable for the loan even if the borrower becomes permanently disabled or dies, but some private student loan lenders voluntarily cancel the debt in these circumstances. For loans extended after November 20, 2018, the lender cannot declare a default and ask for the immediate payment of the full loan amount from either the student or a co-signer just because the student has declared bankruptcy or dies. For loans extended after that date, a co-signer’s legal obligation is also released upon the student’s death. Even for loans extended before November 20, 2018, lenders may voluntarily implement the same protections.


You cannot consolidate private loans into federal loans. You should not consolidate federal loans into private ones. But you can look into consolidating higher interest private loans into a lower interest private loan. Also, if your private student loan’s interest rate is more than 6%, and you go on military active duty after taking out the loan, you have a right to reduce the interest rate to 6% while you are on active duty. If the lender does not adjust your rate automatically, notify it of your active duty status.


In general, the ability to discharge private student loans in bankruptcy is subject to the same difficult standard as applies to federal student loans. But there is an important exception. If the school you attended (such as an unlicensed vocational school) is not eligible to participate in one of the federal student financial assistance programs, then you can discharge the private student loan in bankruptcy just like any other unsecured debt.


Defending Against a Private Student Loan Collection Lawsuit. Private student loan lenders do not have the collection tools available to the government, so that they are more likely to sue on an unpaid debt. But you have a number of defenses to such lawsuits.


If the school itself initially gave you the loan or referred you to a private lender, then you can raise as a defense to the collection law suit any claim or defense you have against the school. A viable defense might be that the school misrepresented graduates’ employment prospects or the overall quality of the program, or engaged in other serious misconduct, but not that the math teacher was too tough.


Look carefully at any collection fees the private lender is seeking. The right to those fees must be stated in the loan agreement, and state law may further limit collection fees.


If you have a dispute or questions, it is prudent first to contact the lender. Private student loan lenders may have an ombudsman or other customer advocate unit. The Consumer Financial Protection Bureau has a complaint system for borrowers experiencing problems with private student loans. To ask a question or file a complaint, go to https://consumerfinance.gov/complaint or call toll-free 855-411-CFPB. You can also contact your state or local consumer protection agency to make a complaint or seek assistance.

HOW YOU CAN COMMENT:

The comment page should be available by tomorrow when the proposed rules hit the federal register;
you can find it by searching at  https://www.regulations.gov/  
for RIN 1840-AD26;
Docket ID ED-2018-OPE-0027

There will be a 30 day comment period from the date it is posted in the federal register.

National Consumer Law Center Contacts: Abby Shafroth (ashafroth@nclc.org) or Jan Kruse (jkruse@nclc.org); (617) 542-8010
 
Education Department Proposes New Rules
that Would Make it Much Harder for Students Harmed by For-Profit Schools to Get Loan Relief
 
Boston - Today, the U.S. Department of Education proposed new rules, replacing 2016 rules, that would make it much harder for students who are harmed by illegal school conduct or closures to get relief from their federal student loans or to hold schools accountable for illegal conduct. The Department proposes to severely restrict access both to “borrower defense” loan relief for students cheated by predatory schools that used illegal enrollment tactics and to loan relief for students whose schools closed before they completed their education. 
 
“The federal student loan system is supposed to promote economic mobility and provide a ladder to a better future for low-income Americans,” said National Consumer Law Center attorney Abby Shafroth. “But for too many Americans it has done the opposite—putting targets on low-income, financial aid eligible students and veterans who are recruited by predatory institutions focused on growth and profit rather than on education and career training. It doesn’t have to be this way. The Department can and should apply rules that deter schools from lying to students to get them to enroll and that ensure students who were taken advantage of have real access to relief.”
 
Troublingly, the Department announced that it is considering severely restricting access to relief for student borrowers who are not in default. It is even considering refusing to allow students who are not in default to apply for borrower defense relief based on their school’s illegal conduct.  Either alternative would unfairly punish borrowers who manage to stay out of default—and may even encourage default.  The new rules would also narrow the grounds for federal student loan relief and eliminate the process to provide relief to groups of students who were subject to widespread misconduct or fraud. It would require students to submit more evidence (which borrowers often don’t have access to) and prove more difficult facts (such as what the school knew when providing false information). It would create a lopsided process that gives schools, but not students, the opportunity to respond to all the evidence and appeal adverse decisions. Additionally, the rule would make it harder for students to hold schools directly accountable for their illegal conduct by allowing schools to use forced arbitration clauses and class action bans to deprive students of their constitutional right to bring claims to an impartial judge or jury.
 
Moreover, despite recent widespread school closures that have left students with huge debts and no degree, the Department’s proposal would severely restrict federal student loan relief to students harmed by school closures. Its proposal would render students ineligible for closed school relief so long as their school provides an option to complete their program at a different school (as closing schools are generally already legally required to do), and would axe a 2016 rule that would have automatically discharged loans for eligible borrowers whose schools closed.
 
The Department has refused to implement borrower defense rules finalized in 2016 and plans to apply these new rules instead. Secretary of Education Betsy DeVos characterized the 2016 rules as making it too easy for student loan borrowers to get relief. The Department’s summary of the new rules states that they are designed to address concerns expressed by a for-profit school industry trade group and other industry representatives that the 2016 rules would impose financial liabilities that might imperil the viability of some schools. The proposal reflects an ongoing shift to protecting the multi-billion dollar for-profit education industry at the expense of students, and comes at a time that concerns about conflicts of interest have been raised about the role of former for-profit school executives hired by the Department.
 
Shafroth, a staff attorney for the National Consumer Law Center’s Student Loan Borrower Assistance Project, participated as a representative for legal aid organizations in rulemaking meetings held by the Department of Education in Washington, D.C. that preceded this proposed rule. Shafroth and other representatives for students, veterans, and low-income borrowers made numerous suggestions to the Department to ensure that the rule would provide student borrowers reasonable access to relief, but those suggestions were not included in the proposed rule.
 
 “If these proposed rules are implemented, schools will continue to break the law and harm students with impunity, and student borrowers will continue to pay the price,” said Shafroth. “We urge the Department of Education to promptly implement the 2016 rules and to use this rulemaking to make it easier, not harder for students to get relief.

We also urge students and the people who care about them to send comments to the Department of Education telling it to put students and taxpayers first over predatory schools.” 
 
 
Related NCLC Resources

Issue Brief: The Borrower Defense Rule protects students and taxpayers against fraud and abuse in higher education. (January 2017)
 
Comments of NCLC to the Department of Education Re: Borrower Defense Rule Delay and Intent to Establish Negotiated Rulemaking Committee (July 12, 2017)
 
Comments of NCLC and 16 other legal aid groups to the Department of Education re: Proposed regulations on borrower defenses and use of forced arbitration by schools in the Direct Loan Program, and proposed amendments to closed school and false certification discharge regulations. (August 1, 2016)
 
Blog: Who is the Department of Education Looking Out For? Another Delay of Student Protections Follows a String of Actions Protecting Industry Profits Over Students 

Further Information on school-related cancellation of federal student loan debt.

library.nclc.org


Wage Garnishments and Bank Account Seizures:

Consumer Debt Advice from NCLC
Author --- Carolyn Carter


This article focuses on consumer rights and strategies to deal with your civil court judgment debt. Creditors and debt buyers bring millions of collection lawsuits which usually result in a court judgment for the creditor or debt buyer. A court judgment for the creditor triggers the creditor’s right to seize your wages, benefits, bank accounts, cars, and even your home. This article sets out consumer rights and strategies for responding to and limiting these creditor rights.As discussed below, once a debt becomes judgment debt, it can quickly lead to loss of wages, benefits, bank accounts, personal property, and even your home. In extreme cases, it can even result in your incarceration.

You have rights to limit these consequences, but to protect your property you must understand these rights and raise them aggressively when a creditor tries to take these steps.


Although you should have received notice of a lawsuit against you and notice of any ruling from the court that you owe a debt, surprisingly often consumers never know that a judgment was entered against them. The first they learn about the court ruling is when their wages are garnished, their bank accounts frozen, or their property seized. Always pay close attention to any legal documents sent to you so that you can head off the worst.


On the other hand, a creditor cannot seize your wages, bank account, or property unless and until it brings a law suit and a court enters a judgment against you. There are two exceptions to this:

1.  * Secured creditors, such as your auto or mortgage lender, can seize their collateral if you get behind on your payments to them.
2. * The government can garnish your wages and seize tax refunds to repay student loans or other debt owed to the government.

But for credit card, medical, and other unsecured debt owed to private creditors, your wages, bank account and property are not at risk until a court issues a judgment against you.


Even if a court does enter judgment against you, there are still legal limits on how much or if any of your wages, government benefits, and money in your bank account can be seized and limits on whether property can be sold to pay off your debts. For many people, these limits mean that there is nothing that a creditor or court can do to make you pay a court judgment. This is called being “judgment proof” or “collection proof.”


To be collection proof, your income must be low enough that it is fully protected from garnishment, that all of the money in your bank account (if you have one) consists of government benefits or is otherwise protected from seizure, and that your personal property and home are all exempt from seizure. In that case, you do not have to worry about the judgment debt until your financial situation substantially improves. When your financial situation does improve, however, the creditor may be able to collect on its debt at that point.


If you are not collection proof, then you must pay careful attention to the implications of a court judgment against you. This article outlines how to protect your wages and property from seizure to pay your court judgment debt and other steps you should take when your wages and property are at risk.


Garnishment of Your Wages

When there is a court judgment against you, the creditor has the right to “garnish” your wages. This means that the creditor can get a court order requiring your employer to deduct a portion of your wages from your paycheck and send it to the court to be applied to the judgment debt. With the exception of a student loan debt or a debt owed the government, garnishment can take place only after the creditor obtains a court judgment against you.


After obtaining a court judgment, the creditor must file a request for garnishment with the court clerk, sheriff, or another local official depending on state practice. A notice is then issued to the “garnishee” (your employer), directing it to turn over a portion of your paycheck at a specified time. You must be given notice of the garnishment and you can request a hearing to prove that state or federal law protects your money from garnishment. In some states, you have the right to ask the court to reduce the amount of the garnishment because of hardship or because you have recently received public assistance.


A portion of your wages is protected from seizure. Federal law protects most of your wages from garnishment, and, if your wages are very low, your paycheck is entirely protected. “Wages” that are protected include commissions, vacation pay, sick pay, disability benefit payments, and pension and retirement payments. The first $217.50 from weekly take-home pay, after taxes and Social Security are deducted, cannot be garnished at all. This amount will go up if the current federal minimum wage of $7.25 per hour goes up.


If your take-home pay is between $217.50 and $290 a week, then only the amount over $217.50 can be garnished. If your take-home pay is more than $290 a week, then 25% of your wages can be garnished. For example, if your weekly take-home pay is $250, then $32.50 a week ($250 minus $217.50) can be garnished. If your take-home pay is $600 a week, $150 a week (25% of your pay) can be garnished. A higher amount can be garnished if the debt is for child support or alimony. If your wages are garnished, your employer will be given instructions about how to make these calculations. You do not have to do anything to trigger the protected amounts, but you may want to double-check your employer’s calculations.


Importantly, this is the federal limit on garnishment.

State law may limit garnishment even more or even prohibit wage garnishment. However,

Neither the federal nor state limits on wage garnishment may apply once your paycheck has been deposited into your bank account.


Federal law also protects you from being fired because you are being garnished for a debt. This protection does not apply, however, if your wages are being garnished for more than one debt.


If you are an independent contractor. Some workers are classified by their employers as independent contractors. (Your employer is probably treating you as an independent contractor if it is not deducting your Social Security contribution from your pay check.) Most courts rule that federal limits on wage garnishment do not apply to payments you receive as an independent contractor.


In theory, a creditor could get an order seizing all of the payments to you as an independent contractor to repay a judgment debt. However, this will be complicated for the creditor and many creditors won’t even try to do so. In addition, some states protect independent contractor payments the same as wages.



Government Benefits Completely Protected from Garnishment
Many types of federal and state benefits are completely protected from garnishment. Examples are Social Security, Supplemental Security Income (SSI), and veteran’s benefits (except to pay certain child support obligations). These benefits are protected no matter how much you receive. States also usually exempt TANF (Temporary Assistance for Needy Families) and unemployment compensation benefits from garnishment as well. But once you put these benefits into your bank account, different rules apply.



Freezes and Seizures of Your Bank Account

A creditor can get a court order seizing money from any of your bank accounts to repay a judgment debt. Certain federal benefits, such as Social Security, SSI, and VA benefits, that are deposited in your bank account are protected (with exceptions for child support and debts owed to the federal government).


Federal law requires your bank to protect certain benefits that are direct-deposited into your account within the last two
months. The bank is prohibited from turning over any Social Security, SSI, or VA benefits deposited within the last two months. The bank must send you a notice telling you what it is doing, but you do not have to take any steps to protect these benefits.


Social Security, SSI, or VA benefits deposited into the account more than two months beforehand are also protected—but the protection is not automatic. You will usually have to fill out papers and possibly go to court if you need to protect more than the last two months of benefits.


An easy way to protect all your Social Security, SSI, or VA benefits is to have them loaded onto a Direct Express prepaid card, instead of sent to a bank account. Those funds will then be automatically protected, no matter when they were received. You can sign up for the Direct Express card by calling 1-800-333-1795 or by visiting www.USDirectExpress.com.


As discussed below, other protections for your bank accounts require you to fill out papers and possibly go to court. For example, states usually protect workers compensation, unemployment compensation, and state employee retirement benefits from seizure, and some even allow you to protect wages deposited into your bank account. Some states have laws that protect a set amount in a bank account, such as $200 or $1,000, regardless of the source of the funds.


When a creditor obtains an order to seize your bank account, the bank typically will freeze the funds in your account, giving you a short period of time to claim that the funds are protected from seizure. The burden is on you to show that the funds are protected.


Usually you will find out that your funds have been frozen when you try to withdraw money, write a check, or use your debit card. Social Security, SSI, or veterans benefits directly deposited into your account during the last two months cannot be frozen. But other benefits can be frozen, and you must act quickly to show that at least some of the frozen funds are protected by law and should be unfrozen.


If some of your money on deposit is protected from seizure but some isn’t, it may be helpful to set up two accounts, one of which receives just protected funds. That way, it’s easier to prove that all the money in that account is protected. Spend the money in the unprotected account first.


Protecting Your Car and Personal Possessions from Seizure

In theory, after a creditor gets a court judgment, it can ask a sheriff to seize your car, household goods, or other personal property and then creditor would sell the property to repay the debt, often called “judgment execution.” In practice, most states limit this kind of seizure so much that a creditor has no financial incentive to have this property seized and sold. You have more to fear from wage garnishment or seizure of your bank account than from loss of personal property.


In many states, exemption laws protect your car and other personal property from seizure to pay a court judgment. (Exemption laws do not apply to secured creditors. For example, an auto lender can repossess your car if you do not keep up on your car payments.)


Exemptions laws vary considerably by state. Some laws specify that a specific dollar amount of all your personal property is exempt from seizure, such as $8,000. You can choose which items of your personal property you want to keep, as long as what you keep has a value of $8,000 or less. Others specifically exempt an item of personal property, such as a car, if its value is under a certain amount.


The value of your car or personal property typically is not determined based on what the property is worth, but how much “equity” you have in the property. Your equity is how much the property is worth now minus any amount you still owe on a loan that takes that property as collateral. For example, if your car is worth $10,000, but you owe $7,000 on your car loan, your equity in the car is only $3,000. A $3,000 property exemption would fully protect your $10,000 car from seizure to repay a judgment debt. Remember, however, that if you do not keep up on your payments for the $7,000 car loan, the auto lender can still repossess the car.


States may list certain types of personal property that are totally exempt from seizure, no matter how much money they are worth, such as tools and supplies required for your occupation, clothing, a bible, and certain household goods.


Some creditors or their attorneys or collection agents may try to force you to turn over property that by law is exempt from seizure, pointing to small print in the contract that says you agreed to waive rights under state exemption laws. Do not give in—these contract provisions are illegal and unenforceable.


If the creditor asks a sheriff to seize personal property that is exempt, file a notice of exempt property or take similar steps specified by your state law. In many states, you will need to file papers with the sheriff or a public official by a certain deadline in order to get the benefit of an exemption. The sheriff also cannot seize property in your possession which does not belong to you. To stop its seizure, the property’s rightful owner may have to file a declaration of ownership with the appropriate office.


If the sheriff is able to properly seize your property, it will then be sold at public auction, and the part of the proceeds that are not exempt will go to the creditor to help pay off the judgment. These auctions are usually poorly attended and bring low bids. For this reason, creditors rarely seize used household goods, which will have minimal resale value. If property is sold at auction, you or your friends can attend the auction and re-purchase the possessions at a bargain price. After a sale, if the sale proceeds are not enough to pay the judgment in full, the creditor may keep trying to collect the remainder.


Court judgments remain on the books for many years. Even if a creditor does not try to seize and sell your property after obtaining a judgment, it still may try to do so years later.


Because state exemption laws are complex, you may want to get professional help to understand which items of your personal property are subject to seizure. Look also for a guide to exemption laws for your state, which may be available from the local bar association, a legal services office, or a nonprofit consumer credit counseling agency. Make sure the guide is up-to-date.


Protecting Your Home from Seizure

Your home is at risk of foreclosure if you do not keep up on mortgage payments. Your home is also at risk of being sold if you owe a judgment debt, but that risk is much smaller. When a creditor obtains a court judgment on a debt, even just credit card or medical debt, the creditor can then put a lien on your home for the amount of the debt. With a lien in place, the creditor can then force a sale of your home or the creditor can simply hold onto its lien and wait for you to sell the home before trying to collect on the lien.


In some states, if husband and wife own a home jointly, the home cannot be seized to pay the debts that only one spouse owes. On the other hand, if both spouses are obligated on the debt, the judgment creditor can force a sale.


Most states have a homestead exemption that protects your home from being sold to pay a judgment debt as long as your equity in the home is less than a certain amount. While some states protect $100,000 or more, many states protect less. And few states completely prohibit a creditor from forcing the sale of your home to pay a judgment debt, no matter how much the home is worth.


A homestead exemption can protect your home from seizure based on a judgment debt. However, a homestead exemption does not protect you if you are in default on a first or second mortgage, on a home equity line of credit, or on any other debt if your home is collateral for that debt. In addition, in some states, to benefit from a homestead exemption, you must file a declaration of homestead with your registry of deeds office. In a few states, the declaration must be filed before the credit is granted. If you live in a state where a declaration is required, you should always file it as early as possible. In other states, the protection is automatic.


The homestead exemption is a powerful protection. The exemption’s dollar amount applies not to your home’s value, but instead to the equity in your home—home equity is your home’s present value minus the amount you owe on your first and second mortgages as well as any home equity lines of credit or other loans if your home is collateral for the loan.

• Example:
• Mr. J lives in a state with a homestead exemption of $75,000.


• His home is worth $200,000.
• He has $100,000 in principal still due on his first mortgage.
• And Mr. J has $25,000 owed on a home equity loan.
• The total secured debt on his property = $125,000.

In this case Mr. J’s equity in his home is $200,000 - $125,000 = $75,000.


Since the homestead exemption is $75,000, his home is fully protected. A creditor cannot force the home to be sold to pay a judgment debt.


If Mr. J’s home increases in value to $220,000, and if the total secured debt on his property stays the same, then his equity increases to $220,000 - $125,000 = $95,000. The homestead exemption of $75,000 no longer protects all of Mr. J’s equity. The creditor can force a sale.


The first $100,000 from the sale goes to pay off the first mortgage holder. The next $25,000 pays off the home equity loan. Mr. J. keeps $75,000, the amount of the homestead exemption. After these deductions from the sale price, the judgment creditor gets whatever is left up to the amount of the debt. If there are still any sale proceeds left over, those go to Mr. J.


Even though the home is worth $220,000, the creditor under such facts will probably not try to sell the home to satisfy its lien. If the forced sale of the home only brings in $210,000 and selling expenses are $10,000, then there will be nothing left for the judgment creditor. The judgment creditor instead may wait until Mr. J sells the property, since the judgment creditor’s lien stays on the home for many years. When Mr. J sells his home, anything Mr. J clears over $75,000 (after paying off the first mortgage and home equity line of credit) goes to pay off the judgment creditor’s lien, up to the amount of the debt.


One possible way of getting rid of judgment liens is to file for bankruptcy. To the extent the property is exempt when you file for bankruptcy, the lien can be permanently removed.


The Debtor’s Examination and Debtor’s Prisons

There are no debtor’s prisons in the United States, but you can still be imprisoned if you do not show up for a debtor’s examination. After obtaining a court judgment, a creditor can ask a judge to order you to appear in court or in the office of the creditor’s attorney to answer questions about your income and assets to help the creditor find income or property that the creditor may seize. In some states this procedure is called a debtor’s examination, but the procedure goes by other names in other states. Some creditors routinely request a debtor’s examination. Others never do.


A debtor’s examination is a court-ordered appearance. Failure to show up can result in arrest, citation for contempt, and a jail sentence. A notice to appear for a court examination should never be ignored. Always appear or ask the court in writing for a postponement. Courts usually grant a postponement if the creditor agrees to the request or if you have a good reason.


In responding to a notice of a debtor’s examination, review your assets well before the examination. Determine if all your property is protected by law and if all your income is exempt from garnishment. If so, immediately tell the creditor’s attorney listed on the notice. This may be sufficient to get the creditor to drop the request for an examination since it will just be a waste of everyone’s time. But make sure to get this in writing—do not rely on an oral promise that the examination will be dropped.


If there is an examination, be careful how you answer questions since your answers are made under oath and often are recorded by a court reporter. Lying under oath is perjury, which is a crime punishable by jail. On the other hand, do not volunteer information until you are asked for it. If the examination reveals that you have assets or income not protected by law, the creditor can obtain court orders allowing it to seize those assets or income.


In some states, judges also have the authority to order debtors to make payments on the judgment debt. If you do not pay, the judge can hold you in contempt of court and put you in jail. But even in these states, you must be given an opportunity to prove that you do not have the financial ability to make the payments.


Exemption Planning

If you have property that can be seized to pay a judgment debt, consider “exemption planning” that maximizes the protection of your state’s exemption laws by converting property that can be seized (for example, cash) into property that cannot be seized (for example, household goods or your home).


For example, Mrs. Q has $10,000 in equity in her home and $10,000 in a bank account. Her state has a $20,000 homestead exemption and lets her exempt $3,000 in cash. Her home is thus completely exempt from seizure by a judgment creditor, but $7,000 in her bank account is at risk of seizure.


Instead of losing $7,000 to the creditor, Mrs. Q can prepay the mortgage by $7,000. Her equity in the home increases from $10,000 to $17,000, but her home is still protected by the $20,000 homestead exemption. Her remaining $3,000 in cash is fully protected by the state’s $3,000 cash exemption.


Courts often—but not always—rule that exemption planning is valid. Exemption planning is different than an improper transfer of property where you try to give away property to a friend or relative or sell it for a less than it is worth to someone who will later return it. Creditors can have these bogus transfers cancelled as “fraudulent transfers” or “fraudulent conveyances.”


Workout Agreements to Protect Wages and Property

If your wages, bank account, personal property, or home is at risk from judgment debt, you can approach the creditor or whomever is collecting the debt about a “workout” agreement, even after a court judgment is entered against you. Offer to pay all or a portion of the amount due, over a period of months or even years. The amount you offer to pay should be directly related to what the collector can seize. Do not offer to pay $3,000 over twelve months when the only items the creditor could seize have a market value of $500.


Always get a workout agreement in writing. The written agreement should excuse you from attending any debtor’s examination that has been scheduled and should contain a promise not to use wage garnishment or seizure of your property as long as you continue to make payments. Also ask for an agreement to waive the remainder of the debt if part is paid. Some creditors accept partial payment if they know they can’t get payment in full. For the creditor, some payment is better than none.


Bankruptcy Is the Most Powerful Way to Protect Wages and Property

The most powerful way to prevent loss of wages or property from a judgment debt is to file for bankruptcy. The bankruptcy will immediately stop any seizure and may allow you to keep your property permanently.

A student loan expert writes:

The Dept. of Ed has released a new form for borrowers who wish to select Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), or the new Pay-As-You-Earn plan (available starting tomorrow).  This form replaces the repayment section form AND the alternative documentation of income form (ADOI). 

Borrowers should use this form; however, the Department of Education will continue to accept the old forms until April 2013.
 
Here is the Department’s announcement: http://www.ifap.ed.gov/dpcletters/GEN1222.html.
 
With luck, having only one form to complete will be easier for borrowers.