What To Expect from Private Student Loan Creditors After Bankruptcy

Student Loan Debt Bubble, 1980-2011

Student Loan Debt Bubble, 1980-2011 (Photo credit: Occupy* Posters)

It use to be that there was basically only one student loan you could obtain to help you pay the rising costs of higher education– the federal student loan. No longer.

With the deregulation of banking activities that began to evolve in the 1980s and the politically correct view that there is something evil about “Big Government,” banking lobbyists began overwhelming senators and congressmen with perks that would have made King Midas turn green with envy. Since then, the banks have not only horned in on the student loan business in America, they have made it grow into a successful “Big Business.”

Today, the private student loan sector of the student loan industry is about 7 percent of the total student loans representing over $8 billion. So, what can you expect from these upstart privateers who, for the most part, are the same members of the banking systems that was baled out from bankruptcy by the Federal Government of the United States, and hold some of the harshest views on bill collections throughout the banking industry?

Private student loan industry lobbyists were successful at getting their student loans exempt from bankruptcy discharge in the passage of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act. Very few creditor associations not associated with the federal government has ever had that kind of success.

Here are several things of what to expect from private student loan creditors after bankruptcy has been filed:

  1. Aggressive Collection Activity. Private lenders of student loans are notorious for declaring your loan in default the moment the automatic stay is lifted and the bankruptcy discharge has been issued. It does not matter whether or not the loan has been postponed because of the automatic stay of bankruptcy, and it does not matter you have made every payment on time. Filing for bankruptcy protection normally sends a message to the privateers that often causes a negative reaction in them that will most assuredly hurt your credit scores.

    The industry collection agencies are keenly aware of the their legal rights to collect, and that bankruptcy is no defense against collection of student loans. They take full advantage of these facts.

  2. A Certain Unexpected Reasonableness. Especially in today’s economy, the private student loan sector is for the most part, reasonable about what their expectations of what they will ultimately receive from someone who has filed for bankruptcy protection.

    They realize there are state laws in effect that may prevent them from collections. Cases where insolvency and undue hardship are evident have a real chance of getting the private student loan forgiven post bankruptcy just as much as the federal student loan.

    Private student loan creditors also realize state laws have statute of limitations on certain debts, and if state laws include time limits on those types of loans, it is not a stretch to think a private student loan creditor can run out of time to legally collect the debt.

    Knowing these facts can entice the private student loan creditor to an unexpected reasonableness at the negotiating table of compromise. You can often settle your debt to a percentage of what you owe.

  3. A Certain Legal Sophistication. Where you may run onto a creditor that hires an unprofessional collection agency that may abuse his collection privileges, most collectors for these types of loans have a legal sophistication. Expect these collectors to eventually file lawsuits to obtain judgments for garnishing wages and attaching assets.

Unfortunately after bankruptcy’s automatic stay, your best options for dealing with private student loan creditors is to work out a plan to pay them all or a portion of the original loan, withstand collection assaults by waiting out the statute of limitations, or hire a lawyer to fight the lawsuits in court.

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