Lawsuits are not very common in federal student loan collection, but they can happen! It is less common for the government to sue to collect on student loans because it has so many tools to use outside of court. Still, it is an additional collection power and the government does use it sometimes. The government refers accounts for litigation if those accounts meet certain requirements such as exhaustion of other collection efforts. In some cases, the government will hire private lawyers to litigate student loan collection cases.
Generally, you should not ignore a lawsuit unless you have no defenses and if there is no possibility of being forced to pay a court judgment. You may want professional help to figure this out. You should be sure to pick up certified mail and accept notices about court actions.
Even if you lose your case and the government or private lender gets a judgment, this does not mean that you must repay the debt. The judgment allows your creditors to use special collection tools to try to collect. The effectiveness of these tools depends on how much income and property you have and on the type of income and property. Certain types and amount of property, income, and assets are protected by federal and state law from seizure.
The most important strategies to consider if you have been sued are:
- Fighting back by raising defenses,
- Understanding what might happen if you lose your case and a judgment is entered against you, and
- Checking for special rights if you are in the military.
The best way to deal with a lawsuit is to win it. You may have a defense to a lawsuit which can be raised in court. Sometimes just raising a defense will lead the creditor to drop the case. It is also cheaper and easier to respond to a lawsuit than to start your own at a later date.
Common Defenses to Consider Include:
- That money was paid by you but not credited to the account;
- That the debt is not owed or that you are current on your payments;
- That the creditor miscalculated the amount due. For example, the creditor may be seeking attorney’s fees or collection costs that are too high or possibly not allowed by law;
- That the creditor is collecting more than you agreed to pay;
- That you never agreed to pay the debt (if, for example someone fraudulently used your name);
- That the debt has been discharged in bankruptcy; or
- If it is a private student loan, that the creditor has waited too long to sue you.
You may also have a defense that the loan is not enforceable. This can occur because of forgery, mistake or fraud, or other reasons. In most legal actions, you can also raise a defense that a contract is not valid because you were under age when you signed it. This defense, however, is not available in government student loan collection actions.
Some of the defenses you can raise are similar to the government loan discharges available outside of court. If you think you qualify for a discharge, you should get help from a lawyer if possible and ask the court to delay your case while you apply and wait for a response. You cannot ask the court to grant these discharges. You must apply separately to your loan holder.
In some cases, you can also defend a lawsuit because of problems you had with the school. You should also be able to raise these claims if you are not in default, as a “defense to repayment.” In some cases (for example if you have a FFEL or most private loans), you can only raise these types of school problems as defenses if the school and lender had an affiliation of some sort.
If you lose your case, you can appeal to a higher court. Deadlines for filing an appeal are generally short and strictly enforced. You may need professional assistance in bringing an appeal. Appeals rarely involve a completely new presentation of the case. Usually, an appeals court will review the case only on the facts presented in the court below it.
What Happens if you Lose Your Case
A judgment after you lose a case gives the creditor the right to force you to pay using a variety of methods. The court order lets creditors use several special collection tools to try to collect from you. How effective these tools are will depend on how much income and property you have.
When losing a lawsuit cannot hurt you, you are called “collection proof.” This means that your assets and income are small and are protected by federal and state law from seizure by creditors. In that case, you do not really have to worry about the judgment unless your financial situation substantially improves.
If you are faced with a collection lawsuit, you should know in advance whether you are collection proof. You may need a lawyer to help determine this. It depends on whether all your income and property are protected by federal and state “exemption” laws. These rules are very different depending on which state you live in. You may want to get professional help to understand the exemption laws available in your state. At a minimum, you should try to find a publication that explains your state’s laws. This type of publication may be available from the local bar association, a legal services office, or a consumer credit counselor. Make sure any source you rely on is up-to-date.
1. Exemptions May Protect Your Car, Household Goods, and Other Property From Seizure.
Some exemptions specify dollar amounts of property that are exempt from seizure. Some states specify that certain types of your property are totally exempt from seizure, no matter how much money they are worth. A list of totally exempt property typically includes items such as tools and supplies required for your occupation, clothing, a car (usually with a value under a specified amount), a bible and household goods.
2. Exemptions May Protect Your Home
Homestead exemptions protect your residence, and can be as high as $100,000 or more in some states, but can also be significantly less in others.
To benefit from the homestead exemption in some states, a declaration of the homestead must be filed with the property registry in your community. In a few states, this paper must be filed before the exemption is granted. You should always file your declaration as early as possible if you live in a state where a declaration is required. In other states, protection is automatic.
A relatively small homestead exemption amount may be enough to protect property worth a lot more. If you have equity above the exemption limit, the creditor can force a sale and you are only allowed to keep the amount of the exemption from the sale proceeds.
Example: Josie lives in a state with a homestead exemption of $30,000. Her home is worth $150,000. Josie has a first mortgage of $100,000 and a $20,000 home equity loan. The total liens on her property = $120,000.
Equity equals the value of the home minus the liens. In this case, $150,000 – $120,000 = $30,000 in equity.
Since the homestead exemption is $30,000, her home is fully protected from execution by a judgment creditor. She doesn’t have to worry that a creditor can force a sale of her home.If Josie’s house increases in value to $200,000, her equity also increases. The new amount of equity would be $200,000 – $120,000 = $80,000. The homestead exemption of $30,000 no longer protects all of her equity.The creditor in this case could force a sale. The first $100,000 from the sale would go to the mortgage holder. The next $20,000 would pay off the home equity loan. Josie would get to keep $30,000, the amount of the homestead exemption. This leaves $50,000 of sale proceeds available to pay off the creditor that initiated the sale. If the creditor is owed less than $50,000, Josie will get any balance left.
A creditor can force a sale in this case but won’t necessarily do so. Forcing a sale is expensive. The creditor may instead wait to collect on the lien until Josie sells the property.
3. Exemptions May Protect Your Income and Cash From Garnishment.
A creditor with a court judgment against you has the right to “garnish” money belonging or owed to you that is in the hands of a third party. Most often, garnishment takes money from your wages or bank account.
After obtaining a judgment, the creditor can file a request for garnishment with the court clerk, sheriff, or another local official depending on state practice. A notice is then issued to the “garnishee” (a bank, an employer, or another third party holding your property), directing that party to turn over the property at a specified time.
You must be given notice of the garnishment. You can then request a hearing to prove that state or federal law protects your money from garnishment. This garnishment process after a judgment is different than administrative wage garnishment that the government can use outside of court to collect.
Current federal law provides that the first $217.50 from weekly take-home pay, after taxes and Social Security are deducted, cannot be garnished at all. This $217.50 is based on a formula that is linked to the minimum wage. If the minimum wage goes up, the amount of wages protected from garnishment also goes up. If the weekly take-home pay is more than $217.50, an employer, in response to a garnishment order, must pay the smaller of the following amounts to a sheriff:
The weekly take-home pay (after deductions) minus $217.50; or
25% of that take-home pay.
For example, if your weekly income after deductions are taken out is $300, your employer would be required to calculate the amount due under the two formulas: (1) ($300 – 217.50 = $82.50) or (2) (25% of $300 = $75) and pay the creditor the smaller amount. In this case, your employer would pay the creditor $75.00 from your take-home pay. A higher amount can be garnished if the debt is for child support or alimony.
In some states, you have even greater protections against wage garnishment. You can find out more about the rules in your state by contacting your local legal aid office or local bar association. Court clerks may also have this information. You should always ask if the information is up to date.
4. Certain Types of Income, Primarily Government Payments, Are Completely Exempt from Garnishment.
Even if your income is large enough so that a portion may be garnished, certain sources of income are completely protected under federal or state law. For example, federal law almost always exempts Social Security payments, Supplemental Security Income, and veterans’ benefits. States with TANF (Temporary Assistance for Needy Families) and unemployment insurance programs usually exempt those benefits from garnishment as well.
These government benefits are safe from collection if the government or a private lender sues you and gets a judgment against you. But remember that the government can take certain federal benefits to collect outside of court.
Special Rights for Military Personnel
If you are notified of a lawsuit against you while you are on active duty with the military, or within the first ninety days after you get off active duty, you can ask the court for a “stay.” If you succeed in getting a stay, the lawsuit will not be dropped, but the case will not move ahead while the stay is in effect. Once the stay ends, you have to defend the case.
To request a stay, send a letter to the court explaining how your current military duties prevent you from appearing in court. The letter must state when you will be able to appear. It must also include a statement from your commanding officer that your current military duties prevent you from appearing in court and that military leave is not authorized for you. Once the court gets this letter, it must order a stay for at least 90 days. If you need more time, you can ask for it in the letter.
These protections should apply to student loan collection proceedings outside of court as well.
See information about the Servicemembers Relief Act.