Student loan debts may always be cancelled or discharged at the discretion of the lending institution. However, in terms of discharging student loans through bankruptcy, several laws have made student debt forgiveness very difficult to obtain.
For example, under both Chapter 7 and Chapter 13 bankruptcy categories, student loans are not automatically discharged if the debtor files for bankruptcy. In effect, the only way to obtain a student loan discharge under bankruptcy is through proof of severe financial hardship.
On the other hand, if the lending institution does not act upon the debt in a timely manner, the debt may sometimes be subject to an automatic discharge. Also, creditors cannot collect on debts while a bankruptcy proceeding is underway or is pending.
Depending on who issued the loan, and what the loan amount is, there can be several legal consequences of defaulting on a student loan. The Department of Education or the lending institution itself may take the following actions in order to recover payment for the debt:
- Seize Income Tax Returns: this is the most common way for creditors to obtain payments on loans.
- Wage Garnishment: The Department or lending agency is allowed to garnish a maximum of 15% of the debtor’s disposable income. This amount must also be no more than 30 times the minimum hourly wage.
- Revoke Federal Benefits: In some cases, up to 15% of federal benefits may be used to collect on debts. This is usually taken from Social Security benefits. Only $9,000 a year maximum can be used, however
- Revoke the Debtor’s Professional License: Some jurisidictions may allow the state to suspend, revoke, or refuse to issue a professional license if the debtor has defaulted on a student loan. This can apply to professionals such as teachers, doctors, attorneys, and state agents.
- File a Civil Lawsuit: In limited instances a civil lawsuit can be filed to collect on the student loans. The court may grant the creditor access to the debtor’s assets such as property or bank account savings. This is no statute of limitations or deadline for the government to file such a lawsuit. However, since the debtor is already in debt, a lawsuit is usually the last resort since the debtor lacks significant assets.
If the Department or lending agency utilizes any of the collection efforts listed above, such as seizing a tax refund, they will usually first send the debtor a notice that they will be initiating such measures. The notice will usually contain the option to either repay the debt or appeal the tax refund seizure. If the debtor does not choose to appeal, then the tax refund may automatically go towards the debt repayment.
An appeal against a tax refund seizure, garnished wages, or other collection methods listed above may be based on the following grounds:
- The student loan has already been repaid
- The loan has been deferred, is in forbearance, or was previously cancelled
- The loan is currently being paid under a different repayment plan
- The loan does not actually belong to the debtor
- The loan was legally unenforceable due to fraud
- The borrower has become incapacitated, disabled, or is deceased
- The borrower’s school has closed (the student has not yet graduated)
- The borrower was mistakenly certified as eligible for the loan
- The borrower is owed a refund by their school
- The borrower has a pending bankruptcy claim or the loan was discharged through other measures.
Therefore it is very important for a student lender to be aware of any conditions that may affect their current debt situation.
Defaulting on a student loan can lead to several legal consequences including possible exposure to a civil lawsuit. You may wish to consult with a bankruptcy lawyer if you are unsure of the status of your debt situation. Also, it may be very helpful to hire an attorney if you will be contesting or appealing any collection efforts initiated against you. Your lawyer will be able to present all your options to you and guide you through the appeal process.