Student Loan Default--What Will Happen?

Student loan default occurs when the borrower does not stay current with payments. You become delinquent the first day the borrower misses a payment. If you stay in delinquent status for nine months, the loan than enters into default. The borrower may be responsible for debt collection fees and loan guaranty agency commissions.

One of the most effective methods that the department of education and loan guaranty agencies uses to collect on defaulted student loans is to take the borrower’s tax refund. The IRS receives a report from the Department of education with information pertaining to student loans that are in default. The borrower receives notification from the department of Educationor Loan Guaranty agency giving them the option of paying the debt or appealing the offset. This is offered before a tax offset is removed from the refund. Unless the borrower makes an appeal, the IRS will automatically seize theborrower’s federal and/or state tax refund and apply it towards the loan payment. The borrower may appeal the offset with proof of the following defenses.

• The loan has been repaid
• The loan is being paid under a negotiated repayment plan
• The loan is in deferment, forbearance, or has been cancelled
• The borrower is deceased or suffers from permanent and total disability
• The loan does not belong to the borrower
• The loan is unenforceable because of fraud, such as a forged signature
• The school owes the borrower a refund
• The borrower's school closed
• The borrower was falsely certified for loan eligibility or
• The borrower has filed for bankruptcy and the case is still pending, or a bankruptcy discharged the loan

An objection must be entered by the borrower to offset within 65 days from the date of the notice.

The Department of Education and loan guaranty agencies may also garnish wages to offset a student loan debt. It is important to know that it is unnecessary to obtain a court judgment prior to garnishment. Fifteen percent of the debtor's disposable income can be garnished. The amount must be less than 30 times the hourly minimum wage ($7.25/hour effective July 24, 2009), however. Therefore, the Department or agency may garnish no more than $217.50 of adebtor's weekly income.

A borrower will receive a notification from the Department of Education or the loan guaranty agency of intent to garnish wages. The borrow will have the opportunity to repay the debt or the right to request a hearing to dispute the wage garnishment. The borrower can raise an objection on the reasons listed above.

If a borrower requests a hearing within the deadline specified in the notice, the borrower's wages are safe from garnishment while the case is under review. If the debtor fails to make such a request by the deadline, however, the wage garnishment may proceed, but will terminate if the debtor ultimately prevails in a hearing.

The Debt Collections Improvement Act allows the government to take some social security benefits from a student loan borrower in default. Supplemental Security Income is off limits, but Social Security retirement benefits and Social Security disability benefits can be set aside to pay loan debt. Only $9,000 per year, or $750 per month, can be used, however. If the borrower receives less than this amount, taking Social Security benefits is prohibited. Additionally, the amount cannot exceed 15 percent of the borrower's federal benefit.

The borrower has the option to object to the offset by requesting a review within the specified time on the notice. A borrower may request a modification or suspensionfor reasons of financial hardship. The borrower will have to provide proof ofyearly income, federal benefit, and financial statement.

Revoke Your Professional License

Some states allow professional and vocational boards to revoke, suspend, or refuse to certify a license when the member has defaulted on student loan debt. This typically applies to attorneys, medical professionals, teachers, and state officers. The borrower may request a hearing with the board to review thepotential action.

The Department of Education can sue to collect on a student loan default. Because a statute of limitations is inapplicable, the agency has no time limitations on collecting the debt.

The Department can collect from assets such as bank accounts, valuable property, and can place a lien on the borrower's real property. As the result of such a lien, theborrower may not sell the property until the lien is removed.

If the borrower does not have enough assets or a lawsuit would exceedthe amount recovered from the debtor, the Department will most likely decide against suing the borrower.

Chapter 13 may be an option for you to repay your student loan debt. Student loans are non-dischargeable in bankruptcy. Chapter 13 may allow you to repay student loans in a payment plan over 3-5 years, subject to court approval. Contact your Maryland Bankruptcy Attorney to discuss your eligibility for Chapter 13 and wheth Chapter 13 will help you repay your student loan debt.

Chapter 13 will stop collection efforts of any creditor including student loan lenders or the federal government. Collection efforts may resume upon dismissal of the bankruptcy case or the conclusion of the chapter 13 plan. Contact your Baltimore Bankruptcy Attorney to determine if chapter 13 bankruptcy will help you alleviate your debt and provide a fresh start for you and your family.

Chapter 7 and Chapter 13 bankruptcy have a complicated set of rules. Contact your Montgomery County Bankruptcy Attorney to determine if chapter 13 bankruptcy is right for you.