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Slam the door on student loan collections with Chapter 13 Bankruptcy

Slam the door on student loan collections with Chapter 13 Bankruptcy

Often, when the rate of unemployment declines, collection agencies step up their collection efforts and will begin filing more and more collection lawsuits. After all, consumers are earning more money, and creditors are going after that money. Recently we have seen a significant increase in private student loan collection cases. These private lenders are increasingly aggressive and refuse to work with our clients — instead choosing to rush to the courthouse with their lawsuits. Inevitably, these lawsuits will result in losses due to garnishment, frozen bank accounts, and other collection tactics, which all can be catastrophic to our consumer clients. Under Illinois law, garnishments are at the rate of 15% of gross income. I have never met a consumer who can withstand the impact of a garnishment on the household budget. We MUST do everything in our power to stop wage garnishments.

While private student loans are still only dischargeable in bankruptcy when there is a substantial hardship, such as a significant medical condition, this does not mean that bankruptcy cannot be used to stop these student loan creditors in their tracks.

When we file a Chapter 13 bankruptcy case, ALL creditor collection activity (including student loan creditors) must IMMEDIATELY stop. The filing slams the door on ALL collections. In fact, Chapter 13 allows us a 5 year period that is completely free from collection activity. During that 5 year period, one payment must be made each month to a bankruptcy trustee. Depending on the client’s disposable income, the monthly payment might be as low as $150 per month (the payment is computed on several factors — the scope of which is beyond this post). Using Chapter 13, we can force creditors to accept this one monthly payment for 5 years, creating a vast savings for our client.

For example, let us consider a client who is subject to a student loan garnishment who earns $42,000.00 per year and is paid twice per month. The Client’s gross paycheck is $1,750. A student loan creditor, after receiving a civil judgment against the client, will garnish $262.50 from the client each pay period, or $525 per month. The garnishment continues until the creditor is paid in full – plus the creditor gets to add 9% annual interest under Illinois law. With Chapter 13 bankruptcy, we obliterate the garnishment and it turns into one monthly payment which, almost universally, will be MUCH lower than the amount of the garnishment.

In one recent case involving a private student loan garnishment, we were able to turn a garnishment of $602 per month into a Chapter 13 bankruptcy payment of $156 per month. Over the 5 year Chapter 13 Plan, we will save our client $26,760. At the conclusion of the 5 year Chapter 13 Plan, the client plans to retire — at that point the student loan creditors will receive nothing because the client’s pension will be exempt from garnishment.

If you are facing aggressive student loan creditors, we invite you to contact our office for help. We will carefully explain your options over the phone the first time you call, at no charge.

–Peter L Berk