Private student loans are those made by individual financial institutions rather than by the federal government. Government loans are sometimes called “public loans.” Students who can’t pay their entire tuition costs with public loans will sometimes take out private loans to cover the gap. These loans often have higher interest rates, stricter payback regulations, fewer deferment options, and quicker default guidelines than federal government loans.
If payments are not made in full for a certain amount of time, the balance of a private loan can go into default. Private student loan default can create serious credit and financial problems for the borrower. If the lender or a collection agency hired by the lender seeks and receives a judgment against the borrower, the lender has many financial remedies available to them. The borrower’s assets and bank accounts can be frozen and wages can be garnished as the borrower attempts to recoup lost finds.
What Are the Options for Bankruptcy?
There are two different kinds of bankruptcy. One is liquidation, in which the person declaring bankruptcy surrenders all possible assets in repayment of his debts, and outstanding debts are erased. This is Chapter 7 bankruptcy.
The other kind of bankruptcy is reorganization. This grants the debtor some time in which he or she cannot be penalized for non-payment in order to try to get back on track financially. Chapter 13 bankruptcy is the most common form of reorganization bankruptcy.
What Defenses are Available for Borrowers?
Student loan debts are generally not dischargeable through bankruptcy proceedings. This is applicable to both private and public student loans. USC § 523(a)(8) specifically exempts student loans from Chapter 13 proceedings. In the past, student loans could be discharged if a specific amount of time had passed, but that has been amended so that student loan debt is the borrower’s responsibility for life or until the loan is paid off.
The only possible defense to the problem of overwhelming private student loan debt is undue hardship, when the debtor claims that it would be too difficult to repay their loans because of physical or other limitations that prevent them from earning enough to repay the loan.
These defenses are not usually successful. The court looks at overall financial circumstances and does not usually find in favor of the debtor, generally ruling that the debtor is capable of paying back the loans. Occasionally a partial discharge is granted, but the debtor must still pay back the rest of his or her private student loans to the lender or the collection company that has acquired the debt during default.
Do I Need a Lawyer?
It is advisable to hire a bankruptcy lawyer during any bankruptcy proceeding. A lawyer experienced in bankruptcy law can keep you advised of your best possible options during all phases of the bankruptcy process.