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arkovich_law-narrowZombie second mortgages are becoming quite a problem nowadays.  The typical story is that someone took out debt for either a home purchase or home improvement/repair prior to 2008.  They likely have not received statements, and are current on their first mortgage.  Out of the blue, they are contacted by phone or letter, and often a foreclosure is filed.  The goal of the debt buyer is to obtain a down payment, a payment stream for a debt that is often twice the value initially borrowed.  Then that debt is resold at a tremendous profit.

Because of the short notice, the homeowner frequently starts making payments on this zombie debt, fearing foreclosure – even under circumstances where the homeowner hasn’t received mortgage statements and has received a 1099-C indicating the debt was cancelled years ago.

Don’t agree to this type of forced modification.  If you hire an attorney, the debt likely can be reduced substantially or even eliminated entirely.  But if you start paying them, it is very hard to assert the legal violations that rendered the debt uncollectible.

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Christie_1Major student loan changes are coming July 1, 2026. New borrowers will only have two repayment options — Standard or the new Repayment Assistance Plan (RAP). All other income-driven repayment plans (IBR, PAYE, SAVE) are being eliminated for new loans.

The Grad PLUS program is also being eliminated, and Parent PLUS loans are getting capped at $20,000 per year.

Anyone with a Parent Plus loan now — must have consolidation completed before July 2026 in order to obtain an income driven plan.

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Christie_1The new Income Driven Plan (“IDR”) set to roll out next summer on July 1, 2026 is called the Repayment Assistance Plan (“RAP”) for federal student loans.

The administration’s goal is to eliminate the choices and complexity of the present federal student loan repayment system.  The old IBR, new IBR, ICR, PAYE and SAVE plans are all being terminated.  Those legacy plans will exist for three more years until July 1, 2028.  Thereafter, only those borrowers enrolled in non-RAP IDRs can remain in those plans.  It appears that forgiveness will only occur for those enrolled in IBR or RAP.  For instance, someone could remain in PAYE or ICR, but would need to switch to IBR or RAP for forgiveness.

What is RAP?  RAP is an income driven plan going into effect next summer based upon a borrower’s adjusted gross income (“AGI”).  It will offer a tiered payment plan:

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Christie_1Defaults Increasing:  More borrowers are entering default because they are choosing to either wait out ED and the uncertainty of SAVE, are tired of dealing with their servicers and the constant changes or they simply do not have the ability to make IDR payments.  Default on federal student loans is never a good idea however as the penalties can be quite severe including garnishment, credit impairment, tax refund seizures and debt collection.

Consolidation and Rehabilitation to Cure a Default:  While the Fresh Start Initiative has expired, borrowers can still cure a loan default by a consolidation or rehabilitation.  There are significant differences between the two options.  Borrowers should beware of consolidation without understanding exactly what will happen and why.

Consolidation is a new loan versus a rehab of an existing loan.  Consolidation is basically a new loan where prior IDR credit is invalidated. For instance, if someone has several years of IDR forgiveness credit under their belt, they may not want to lose that.  A rehab of existing loans would be better than a consolidation if someone wants to continue building off that IDR credit to eventual forgiveness.

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Christie_1Early October has many federal student loan borrowers receiving forgiveness emails for those whose backdoor trackers show 300+ qualifying payments, and enrollment in IBR.  This suggests that the Department of Education (“ED”) ran an internal audit and submitted the most straightforward cases first.  We anticipate more rounds of forgiveness emails in the future.  Getting to 300 payments and enrollment in IBR is key.

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Christie_1We have to wait for the SAVE litigation to learn if a new process allowing for Income Driven Repayment credit for all debtors in a Chapter 13 bankruptcy will go into effect.  It is presently enjoined as part of the SAVE litigation.  Rather than penalizing a debtor by simply placing the debtor into an administrative forbearance with capitalized interest, the new Bankruptcy IDR will give a debtor a month of credit toward loan forgiveness for each month the debtor makes a required plan payment under a confirmed Chapter 13 plan. 34 C.F.R. § 685.209(k)(4)(iv)(K).

This program would be particularly valuable for those borrowers with high income who also have large mortgage debt or medical expenses which can be used to reduce disposable income in a bankruptcy to reduce or even eliminate a student loan payment.  These types of expenses cannot be used to reduce an IDR payment outside of bankruptcy.

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arkovich_law-narrowDebt collection in the U.S. operates within a framework of consumer protections using the Fair Debt Collection Practices (“FDCPA”), the Fair Credit Reporting Act (“FCRA”) and the Unfair and Deceptive Trade Practices Act (“UDTPA”).  There are many more federal acts protecting against unlawfully high interest rates, fraudulent mortgage practices, deceptive banking practices etc.  Plus, many states have state based consumer protections acts — Florida calls theirs the Florida Consumer Collection Practices Act (“FCCPA”).

Bankruptcy protections such as the automatic stay, the right to a partial or full discharge also play a significant role to protect a consumer.  All of these laws don’t merely regulate behavior, they also define the boundaries of communication.  For instance, a U.S. consumer must be told who is collecting the debt, how much is owed, and how to dispute it.  Harassment or misrepresentation is strictly prohibited.  Private attorneys act as mini attorneys general in that if a consumer wins, that consumer can obtain his or her attorney’s fees from the debt collector.  That is what fuels a contingency case and tries to keep debt collectors honest.

How will an AI debt collector fit into this system?  Almost certainly, an AI agent would be required to not only disclose that it is a debt collector, but also that it is an artificial intelligence system per the FDCPA.  Not doing so, would likely be a false, deceptive or misleading representation which is prohibited by the FDCPA.

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Christie_1We believe that bankruptcy is becoming a major pathway to addressing student loan debt.  It offers a guardrail – and a penalty for those seeking debt relief; the borrower has to file bankruptcy.  Bankruptcy is outside the purview of ED requiring very little input from ED.  It is simple in that a borrower does not have to spend hours on hold with their loan servicer only to be hung up on, or told different answers.  A simple system run by an entity other than ED, apolitical, offering a guardrail and penalty for those seeking student loan debt relief fits the needs of a Trump administration.

Likewise, a borrower can benefit from having student loan debt addressed in bankruptcy.  It’s non-political.  You file an adversary action which ultimately results in a court order.  That court order offers certainty in very uncertain times.  There is no tax bomb for debt discharged in bankruptcy similar to that debt which is forgiven under the Public Service Loan Forgiveness program.  Partial or full discharge of debt, significantly lower interest rates and payments for private loans, protection of co-borrowers – these are avenues for relief that are either not available or highly questionable outside of bankruptcy.

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Christie_1We received a signed stipulation today on one of our Attestation adversary cases for a borrower making $4k a month who received a 95% reduction on $380k+ of federal student loan debt.  Now her payments are approximately $100 a month with a much more manageable loan balance of $15,600.  Blarcom v. U.S. Dep’t of Education.  While we couldn’t get rid of all of the debt, this set of loans is so much more manageable and best of all, the discharge is 100% tax free in bankruptcy. This client was working, not elderly, nor disabled.  But there was no chance she’d ever make a meaningful dent in this nearly $400k of debt.  I truly believe this will give her a new life and a new purpose.

95% off, and tax-free discharge/forgiveness.  I’ll take that deal pretty much any day of the week!

Case No. 3:23-ap-58-BAJ

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