Lenders Taking More Borrowers to Court Over Delinquent Student Loans
December 10, 2015
numbers-money-calculating-calculation (1)

The number of lawsuits filed over delinquent student loans that were made by private lenders has increased significantly in the past two years.

Private college lenders are getting serious about taking wayward borrowers to court. That’s the latest according to the Associated Press. 

The number of lawsuits filed over delinquent student loans that were made by private lenders has increased significantly in the past two years, lawyers told The Associated Press, even though borrowers are missing payments much less often than they did during the height of the recession.

While private loans amount to just around 7 percent of the $1.3 billion market in student debt, these loans generally have higher interest rates than subsidized federally-guaranteed student loans.

If a lender sues a borrower and wins a judgment in court, that could have severe financial consequences:

  • The borrower’s credit is adversely affected.
  • A judgement may allow the creditor to obtain an order to garnish the borrowers’ wages in order to pay the debt. Borrower income could potentially be reduced to minimum wage levels until the debt is paid.
  • The lender could seize collateral.
  • The lender could seize the borrowers’ personal assets, depending on state laws and the terms of the loan.
  • The lender could actually go after any cosigners on the account.

However, borrowers have a few cards to play as well:

First, an education is not something anyone can ever repossess. Students who have borrowed money for college, by and large, have already received that education.

Second, unlike federal loans, private student loans are dischargeable in bankruptcy. If you qualify for a Chapter 7 bankruptcy filing, you can actually get forgiven the loan balance. However, you will have to divest yourself of a lot of assets, first, depending on your state. After a Chapter 7 bankruptcy, debtors are expected to sell off all but a few of their assets and possessions in order to pay off creditors.

Generally, private loans do not qualify for income-based repayment plans as federal student loans do. However, private lenders do not want you to file bankruptcy, either. So they may be willing to reach compromises that a federally-guaranteed student loan servicer would not consider.

The apparent increase in lawsuits over delinquent student loan balances comes at a time when student loan defaults are increasing across the board: 7.6 million borrowers had not made a payment during the nine month period ending September 30th, 2015. That’s a seven percent increase over the same metric from a year ago, according to a recent U.S. Department of Education report.