Navient Lawsuit Challenges Student Loan Bankruptcy Laws

Navient lawsuit

Student loan servicing giant Navient is currently facing a class-action lawsuit from its borrowers.

Due to mounting pressure from plaintiffs and legislators, the lender recently agreed to cease some of its aggressive collection tactics on the debt of a portion of borrowers who filed for bankruptcy. This provides temporary relief for potentially thousands of Navient borrowers.

What’s more, it could signal a way for borrowers to discharge some student debt in bankruptcy. Here’s how new Navient lawsuit developments could change how bankruptcy and student loans work.

Navient lawsuit developments

In the lawsuit, plaintiffs claim that Navient attempted to collect on loans that had been discharged in bankruptcy. They say the company hounded borrowers, even calling their employers and relatives.

In response, Navient voluntarily agreed to halt collection activities for those who have defaulted on their student loans. The company will likely continue to send bill statements but will stop making daily phone calls to borrowers, their families, and their workplaces. The halt will last at least through the end of the lawsuit court proceedings.

This development is the latest in a string of problems Navient is presently facing. In January, the Consumer Financial Protection Bureau also filed a lawsuit against Navient. Additionally, Attorney Generals in Illinois and Washington both made claims that Navient engaged in predatory lending practices.

Can you file bankruptcy on student loans?

In the 1970s, Congress made changes to the bankruptcy process, making it much more difficult to discharge student loan debt in bankruptcy.

In fact, if a debt falls into the falling categories then it is not eligible to be discharged in bankruptcy:

  • Federal student loans
  • School-offered student loans
  • Qualified education loans from private lenders

Currently, the only way to discharge student loans in bankruptcy is to claim undue hardship.

Undue hardship exists if you cannot afford your loans today and if there is no reason to believe you would be able to in the future. Bankruptcy judges consider your income, as well as your hypothetical earning potential when deciding whether undue hardship exists.

Navient and bankruptcy laws

Lawyers and legislators are now in the midst of challenging student loan bankruptcy laws.

In the past, lawyers have focused on the undue hardship portion of the law concerning student loans. Now they’re focusing on the categories a student loan debt could potentially fall under in order to be eligible for bankruptcy.

For example, student loans that Navient borrowers use for the following are currently not listed as ineligible for discharge under bankruptcy:

  • Non-accredited programs
  • K-12 education
  • Medical school overseas are not part of the categories listed above.

However, Navient collected on them anyway.

Essentially, the plaintiff attorneys in the Navient lawsuit say the company collected on debts that do not fall into the typically ineligible categories of loans. And since they do not fit into these categories, the plaintiff attorneys contend that the loans are eligible for bankruptcy.

By challenging the type of student loans eligible for bankruptcy, it could bring relief to thousands of borrowers.

That’s why this Navient lawsuit could be a groundbreaking change for the student loan industry. If successful, attorneys say the lawsuit would impact approximately 16,000 Navient borrowers.

Think twice before declaring bankruptcy

However, bankruptcy is not a ticket to financial freedom. It’s a serious option that should only be a last resort.

Filing for bankruptcy is also a tedious and expensive process. Consumers need to come up with $1,500 on average to cover lawyer fees and the court paperwork.

And depending on what kind of bankruptcy you declare, you could damage your credit score for up to 10 years. That can make it extremely difficult to get any form of new credit; if you are approved, it will likely be at the highest interest rate possible.

Bankruptcy does not eliminate all forms of debt, either. Fines or penalties you owe to the government cannot be discharged in most circumstances. And if you owe child support or alimony, you’ll still owe those costs after bankruptcy.

Essentially, bankruptcy is only a good option when there’s no other choice. If your debt has grown to the point that there is no way to get it back under control, bankruptcy might be the answer.

While bankruptcy can be a relief for some borrowers who have experienced significant hardship, it’s not for everyone. Exhaust all of your other options before pursuing this route.

For more information about the Navient lawsuit, check out this article on four ways Navient borrowers can protect themselves.

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