I have read quite a few articles on private student loans and have not found conclusive evidence to support or deny that student loans carry the same amount of weight as federal loans. By this I mean that I have read where private student loans are dischargeable in bankruptcy court if they are not secured by the federal government. I have a private student loan who I got from Bank One, I was charged an origination fee by The American Education Resources. Now the origination fee goes into a pool of money , that if I default this money is used to pay it back to Bank One. It is guaranteed but not funding by TERI it was funded by Bank One. The bankruptcy law states that a federally guaranteed loan (notice it does not use the same language as in) funded by a federal or non-for profit organization. Two separate pieces of language. So if my loan is not funded by a non for profit only originated then it is dischargeable in bankruptcy court right? The second part to my question is once a Private student loan is defaulted on (same loan as above) the loan is sold to a debt collector for pennies on the dollar. Does the debt collector have the same collection privileges under the law as did the originator? In other words can the debt collector collect the full amount in court or can they just sue someone to get what they paid for? ----(does the student loan loose it’s “student loan” status and become a regular debt once a debt collector purchases the bad paper? Any answers will be greatly appreciated.
1 Answer from Attorneys
This is a complicated question. Section 523 of the Code deals with exceptions to discharge
Section 523(a)(8) deals with student loans
My reading is that the loan need only be made, insured, guaranteed by a governmental unit, or any program funded in whole or in part by a governmental unit or onprofit organization...
also any other educational loan that is a qualified education loan definein section 221(d)(1) of the Internal Revenue Code of 1986. Hence certain private student loans are not dischargeable.
However if the exemption from discharge imposes an undue hardship on debtor and the debtor's dependents, then the exemption does not apply.
You would have to hire an attorney to advise you whether your private loan is dischargeable and if it is not, whether a showing of hardship can be made in your case.
If a debt collector purchases the loan from the original creditor, he stands in their shoes.
However, debt collectors are subject to the fair debt collection practices act.
Finally, all debt collectors want to make a profit as quickly as possible. If their costs is only pennies on the dollar, you should be able to negotiate with them. Even if your debt is not dischargeable in bankruptcy, that does not mean that it can be collected. The collector would have to file suit, prove the debt, and then try to enforce that judgment. If you have no property that can be sold to satisfy the judgment to repay the debt, it can't be collected.
Hence, you should be in a position to negotiate a payment that is less than the principal amount owed.
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