In our last episode we discussed what to do when a debt collector gets in touch with you about a past due private student loan. But what happens if the private student loan lender files a lawsuit against you after you’ve filed for bankruptcy?
A listener had a private student loan she’d been paying for a number of years before filing for bankruptcy. Her original student loan debt was included in her 2013 bankruptcy and National Collegiate Student Loan Trust purchased it anyway. They kept trying to collect the money from in spite of the fact that she repeatedly told them that the debt was discharged in her bankruptcy.
She wrote them letters, sent copies of her bankruptcy paperwork, gave out her case number and her bankruptcy lawyer’s phone number.
Three years later she was served with a lawsuit for collection of the private student loan. She wrote a letter to her Congressional representative, filed a complaint with the Consumer Financial Protection Bureau, and also the Better Business Bureau.
She was hopping mad, and was going to ignore the lawsuit because the debt was included in her bankruptcy.
What, she wondered, should she do?
Was the Private Student Loan Wiped Out in Bankruptcy?
All debts have to be listed on your bankruptcy papers – that’s the law. But that doesn’t mean all debts are automatically wiped out in bankruptcy. In fact, student loans are discharged in bankruptcy only if the judge issues an order specifically declaring the loans to be dischargeable.
That process, which is called an adversary proceeding, involves filing a lawsuit against the student loan creditor on the basis of undue hardship. That term is defined in different ways by different courts, and he most common standard is known as the Brunner Test.
Under the Brunner Test, in order to be granted a discharge of student loans in bankruptcy, you need to prove the following
- Based upon your current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay your loans.
- Your current financial situation is likely to continue for a significant part of the repayment period.
- You have made a good faith effort to repay your student loans.
Other courts use the Totality of the Circumstances test, which looks at all relevant factors in the case to determine if it is an undue hardship for the borrower to repay his or her student loans. This test is used in fewer places, but it’s important to know about it.
Though it’s not easy to discharge student loans in bankruptcy, it’s not impossible – and many people do get their student loans wiped out in this fashion. However, there’s nothing to indicate that this listener filed an adversary proceeding in her bankruptcy case.
Collectors Will Try to Collect – But Only After Bankruptcy
Student loan creditors and collectors aren’t allowed to try to collect from people while they are in active bankruptcy cases. This prohibition, known as the automatic stay, remains in place until the case is over and prevents collection attempts.
The automatic stay ends once the case ends, so any debts that weren’t discharged in bankruptcy will go back into active collections.
You can get collectors to stop contacting you after bankruptcy by sending a cease and desist letter. That will stop the phone calls and letters, but it doesn’t prevent the student loan company from filing a lawsuit against you for the unpaid balance due.
Writing Letters Won’t Help
Writing letters makes you feel better – and creates something for the government to work with in the event of an investigation later on – but doesn’t accomplish anything.
Members of Congress do not investigate companies – they make laws. If something particularly bizarre is going on then a member might see it as a publicity opportunity, but nothing more.CFPB does have a complaint process, but it functions as a conduit only – they send it to the company and forward the response back to you. Your complaint goes into a database. Complaints help with our work to supervise companies, enforce federal consumer financial
The Consumer Financial Protection Bureau does have a complaint process, but it functions as a conduit only. The agency sends your complaint to the company and forwards the response back to you. Complaints go into a database but not much else is done with them.
The Better Business Bureau handles disputes that relate to marketplace issues experienced with the services or products a business provides. The business will be asked to respond within 14 days, but is not required to do so.
Respond To the Lawsuit or Risk a Judgment
Your response can take a variety of forms, but the most common is an Answer. That’s a legal document filed with the court and served on the company suing you (if they have a lawyer, you have to serve the lawyer and aren’t allowed to contact the company directly).
Your Answer may:
- admit or deny the statements in the Complaint;
- set out your defenses;
- include any affirmative defenses; and
- make claims you have against the creditor – called counterclaims.
You Must Respond to Lawsuits Quickly
If you don’t file and serve our response in the time provided for under state law then you will risk a default judgment.
In California, You have 30 days AFTER the date you are served to file a response with the court. The 30 days include weekend days and court holidays. If the last day falls on a day that the court is closed, you have until the next day that the court is open. If you were served by substituted service, meaning the summons and complaint were given to someone else in your household or place of work, and another copy was mailed to you, you have 40 days from the date of the mailing to file your response.
In New York, if you were given the court papers in hand then your response must be filed and served within 20 days of the date on which the process server files his or her affidavit stating you were served. If you were served in any other way, you must respond within 30 days.
Ignoring the court action won’t make it go away.
Failure to respond in the time permitted by law gives the private student loan company the ability to get a default judgment against you. That default judgment is a binding court order in favor of the lender; once it is entered, you lose and don’t have the right to fight anymore.
That’s the end result for approximately 95% of all collection cases – student loans and others. People don’t respond, so creditors get default judgments.
Once that happens, the student loan company may be able to:
- Start a wage garnishment against you;
- Levy your car;
- Putt a lien on your real estate;
- In community property states like California, garnish your spouse’s wages; and
- Levy your bank account.
Best Advice When Faced With A Student Loan Lawsuit
Two pieces of information:
- Take the lawsuit seriously
- Talk with a lawyer, even if you decide to go it alone or do nothing