THE BLOG
05/13/2013 02:29 pm ET Updated Jul 13, 2013

Will I Ever Be Able to Recover From My Delinquent Private Student Loans?

Reader Question

Dear Steve,

After years of being ill and deciding to take on school i graduated and went onto work but had my student loans to account for.

I just couldnt keep up from the start and decided to give up on applying for forbearance continuously.

Although i make minimal payments to my federal loans i neglected and gave up on my private. The interest just kept building and building.

I definitely saved up for the just in case of emergency and now well into collections and in dire need of fixing all and doing what i can to make amends. I am pretty much in debt for a significant amount

I would like to know what to expect in terms of repayment since ive been delinquent for approximately 5 years.

And is there a way that if i apply what i can will my credit be fixable? Any other information would be appreciated as well.

David

Answer

Dear David,

Thank you for submitting your question for me to answer.

I know the situation feels hopeless but there are options and rather than worry, if you take action you might just find there is hope.

Regarding your credit, it can be resurrected. That's not even really hard to do. Once we tackle the real underlying issue then you can set your focus on rebuilding your credit.

The key to this is really closing the door on the old debt in some way and then getting back in the credit saddle again so you can start to develop a new and better credit history.

Think about your current credit like a report card in school. If you have a low GPA and want a better one, you need to get some better grades to pull it up.

On the federal student loan front there are some good program to help you make affordable payments. In fact I wrote this guide to help people understand how to deal with problem government back student loans.

The penalties that get added on and the interest rates that grow the balance of cast aside student loan debt only magnify the problem beyond reasonable proportions.

If you have cash on hand you can use to settle this old debt, then that's an option. I'm seeing more people getting settlement offers on private student loan deb. It seems though the best chance of success with this approach is when the private student loan servicer makes the offer. Obviously there is some process that gets triggered at some point.

Frank Pipitone, a bankruptcy attorney in New York, was able to settle one such debt for a client. "I was recently able to settle a student loan debt for 35 cents on the dollar. This was a client who was on the verge of filing Chapter 13 and the bank did not want to risk waiting 5 years for payment," said Pipitone.

But, and here is the kind of really surprising thing, your private student loans may be dischargeable in bankruptcy. I know you've heard they can't be but if your private student loans are outside the statute of limitations they actually can be eligible to be discharged in a consumer bankruptcy. And if you qualify for a chapter 7 bankruptcy the loans could be discharged in about 90 days.

The statute of limitions is a tricky thing and depends on a number of factors, including what state you live in. So rather than make any moves or assumptions about if the debt is past the statute of limitations to sue you for and is now time barred, I'd suggest you meet with a local bankruptcy attorney first to check out your options.

You can click here to find a local bankruptcy attorney and talk to them for free about your specific situation. Get the facts and then you can make an informed and educated decision if bankruptcy is right for you.

Meeting with the bankruptcy attorney seems to accomplish two goals for free since bankruptcy attorneys most commonly offer free consultations.

You'd be able to find out your private student loans would be eligible for a discharge under a chapter 7 bankruptcy and what the statute of limitions expiry date would be for your debt.

However, there is one more option to explore while you are meeting with the attorney. If the debt can't be discharged under a chapter 7 bankruptcy, you should talk to the attorney about a chapter 13 bankruptcy and learn what the rules are for handling private student loan debt is in your area under a chapter 13 bankruptcy.

It's actually a little different in different areas. For example, Russ Cope, a bankruptcy attorney in Ohio said, "In certain parts of the country judges, trustees, and debtor's counsel have been working to protect debtors from this. For instance, in Chapter 13 cases in the Columbus, Ohio, and Dayton, Ohio, the judges and trustees are allowing debtors to include special plan provisions that protect debtors from 'charging collection fees, late fees, or any other penalties based solely on upon the reduced pro rata Chapter 13 Plan distributions being less than the minimum monthly payment it would otherwise be contractually entitled to during the life of the Chapter 13 Plan."

So as you can see, all is not lost.

And we really do need to tackle this situation with a definitive plan. All that is happening now it sounds is time is passing by and the debt is just growing. We need to get you back to a point where you can save for retirement instead of limping along without action.

I'm going to assign you some homework here and I'd really appreciate it if you would come back and update me in the comments below.

Your Homework

1. I'd like for you to meet with a local bankruptcy attorney in your area so you can better understand your options regarding the statute of limitations and local chapter 13 practices regarding reduced payments for private student loans. You can meet with the attorney without feeling like you have to become a client. The first step here is just fact gathering.

2. Whatever you learn from meeting with the attorney, I want you to let it percolate for a day or so. Don't rush to make any decisions. You are not on fire so we don't need to act impulsively.

3. If you learn the debt is inside the statute of limitations and bankruptcy is not a good fit for you then ask the attorney you met with, if you liked them, if they have experience settling debts for less than is owed. Depending on the cash you have on hand, a lump sum settlement might make good sense if bankruptcy is not an option. If it is the best option, then read this guide on what you need to know about debt settlement.

If either bankruptcy or settling the debt are the route you want to pursue but you didn't like the bankruptcy attorney you met with, meet with some others. Often the best clue if the attorney is going to be a good match for you is if they provide you with the level of attention and good customer service you feel comfortable with. Yes, I know there are all sorts of qualifications and credentials you can look for but if they are really poor communicators and not friendly, move on to another attorney that values you as a client and who you feel comfortable working with.

4. Report back in the comments below before you take any action and let's talk it through. Or join a debt support group meeting and get more community feedback and help.

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