The bailiff tells everyone to rise as the judge enters the courtroom. As you’re summoned to take the stand, you raise your right hand and swear to tell the truth about why you’ve gone into default with your student loans, as the plaintiff — your lender — watches on.
While this type of legal fiasco might be common in a high-profile criminal trial, a student loan lawsuit isn’t quite as dramatic. You won’t find yourself behind bars if you’re ordered to pay up. (Unless you try to flee the country, of course.)
But being sued by debt collector or lender is still a very real possibility if you’ve defaulted on your payments. It can have severe consequences, making an already difficult financial situation harder to break free from.
What happens in a student loan lawsuit?
Any lender, federal or private, has the right to sue you over defaulted payments that have gone delinquent, and if attempts at collecting them from you have failed.
Surprisingly, the government may not resort to legal action right away. The Department of Education and Internal Revenue Service have the advantage of wage garnishment or tax-refund offsetting as ways to get defaulted borrowers to pay up first.
Private student loan lenders may have the freedom to set their own terms and interest rates, but they have little leeway in getting borrowers to pay up since they don’t have the backing of the government. Thus, a lawsuit may be their most common response to a severely delinquent loan.
If you find yourself embroiled in the beginnings of a debt collection lawsuit, follow some of these tips:
- Don’t panic!
The police won’t come to your residence to arrest you. You’ll usually receive a certified letter in the mail notifying you that you’ve been subpoenaed to court.
- Hire a student loan attorney.
Hiring a good lawyer can help you sort out your options before a lawsuit gets to court. They can help prepare your best defense and represent you in responding to summons, paperwork, and communicating with your lender’s attorneys.
- Stick to deadlines.
Always respond to a summons or other legal correspondence on time. Ignoring the court may mean a ruling in favor of your lender without you getting to tell your side of the story.
- Look for extensions.
If you were actively serving in the military when you were notified of your lawsuit, you can be granted a delay in the start of proceedings — called a “stay” — usually for about 90 days.
Remember that being sued doesn’t mean you’ve automatically lost. Like any legal battle, it means that you have a chance to find representation, go to court, and hash out the facts. Don’t ignore the lawsuit and hope that it, or your loans, will just go away. They won’t.
Common student loan lawsuit defenses
According to Student Loan Borrower Assistance, simply raising a good defense in a debt collection lawsuit may lead to a lender dropping your case, so the reasons you give the court are very important. Some examples include:
- Your identity was stolen and you never agreed to pay the debt; it’s not yours.
- You paid the total amount of the loan, but the lender isn’t current on their records.
- The debt was released in bankruptcy.
- You still have an outstanding balance on your loan, but you’re being sued for more than you owe.
- The loan has been canceled, or the school you were attending closed.
- Your lender waited too long to sue.
Even if none of these defenses apply to you, you and your attorney will need to check the facts.
To do your own homework, check your credit report for any errors. Is the loan indeed paid up, and you’re being sued in error? Is the amount they’re claiming on you correct? And — the judge will determine this — is the collection legally enforceable?
What happens if you win
Simply put, if you win the lawsuit, you don’t owe any money. Of course, a victory will depend on the strength of your legal defense and the validity of your individual circumstances.
If your defense holds water, the court will absolve you of your responsibility to repay what your lender claims you owe. In some lucky instances, the plaintiff may even be required to pay your court fees and legal expenses.
What happens if you lose
Should you ignore the lawsuit or if you put up a solid defense but still lose your case, the court will issue a judgment against you ordering to pay the amount you owe on your student loans. A creditor can then go to various lengths to obtain the money you owe them, including wage garnishment.
At this stage, you may attempt to appeal your case. However, this usually involves an appellate judge reviewing the details and facts of the case and making their own ruling. It’s not a retrial allowing you to reappear in court and try your case again.
You may also be able to assert various exemption rights depending on your financial status. In some cases, defendants may be able to successfully claim that they’re “judgment proof” or “collection proof.”
If you can prove that you have very little money and own few assets, a creditor can’t seize your home, household goods, your car, or raid too much of your earnings or retirement accounts. Homestead exemptions may also protect the equity in your house, depending on the state you live in.
However, if your income was to increase over a certain amount, this exemption may disappear since it may indicate that you can afford to pay back your loans.
Have no fear, negotiation is here
You can aim to negotiate with your creditor and settle the lawsuit out of court. If a reasonable monetary settlement can be reached before you ever step foot into a courtroom, all the better, since it preserves and saves legal costs and attorney fees on both sides.
In a typical federal loan settlement, you may be able to cut down the amount you owe by about 10 percent, through a reduction of the loan’s total balance and waiving of collection fees. Depending on the lender, private loans, according to some legal sources, may often settle anywhere between 30 percent to 80 percent of the amount you may owe.
How to avoid being sued by debt collector
Avoiding a debt collection lawsuit means staying out of default. Making sure you don’t become delinquent on your monthly loan repayments will keep you from being sued by debt collector or lender.
Examine all your options before ever coming close to a legal fracas with your loan provider. If you’re in financial trouble, contact them to work out a payment plan.
Will a graduated or extended option work better for your finances than a standard plan? How about applying for an income-based plan? Deferment or forbearance are other alternatives, too.
Work out the best budget you can according to your current income and expenses, and see what changes you can make in your spending to conserve some money towards your loan payments. The more you’re able to pay down, the further away you’ll stay from going to court over a financial matter that could have been prevented.
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