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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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Christie_1PAYE is an income driven plan which allows for a 20 year term — but it’s expected to age out in 2028 due to the transition to RAP.  So if your count can get to 20 years before then, you should think about moving to PAYE (your loans would qualify if you did not have a loan prior to October 2007 and had a Direct loan after October 2011).  I know these loan dates will restrict many, but 20 years is far better than 30 years under RAP if your loans are eligible.  Please refer to our prior blogs about how to check your IDR count.

Some other news we’ve learned in the student loan world is:

  • If you qualify for private sector IDR forgiveness in 2025, you’ll have no tax consequences even if the forgiveness is processed in 2026
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Christie_1Certification of income is coming back into focus now for repayment of federal student loans.  What if you are self-employed and taking social security and don’t have a paystub?

You can self certify by sending a self-certification letter for income driven plans including:

    • Name,
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Christie_1So what better time to expound upon the benefits of the Student Loan Management Program (“SLMP”) here in a Florida bankruptcy.  I am sure that many of you are thinking if this is so great, why hasn’t it been utilized much to date?

Well, mostly it’s due to timing.  The SLMP began in the Middle District of Florida October 1, 2019 to address the $1.5 trillion student loan debt owed by forty-four million Americans.  Only a few months after the ink dried on the SLMP administrative order, the COVID pause for student loans occurred in March 2020.  Thereafter, there were many extensions, and finally a soft start to loan repayment began on September 30, 2023.  However, for those who were unable to pay, for the first year until October 2024, there was no negative credit reporting or debt collection.  Finally, over the past couple of years, the Biden administration tried to get as many borrowers as possible enrolled in SAVE which offered forbearance once SAVE came under question and an injunction imposed on July 1, 2024.  Re-certification of income under various Income Driven Repayment Plans (“IDR”) kept getting pushed forward, with many borrowers having deadlines of 2026 or even after 2030.  Bottom line, student loan debt repayment was not a priority for many Americans.

However, we believe that consumer borrowers will need to address their student loan debt rapidly beginning this Fall.  Using the SLMP portal is necessary in bankruptcy for those with student loans in order to obtain relief in an IDR plan, partial or full discharge of student debt, or otherwise address what is usually a mountain of debt.  Applications for programs can be submitted via the portal when ordinarily they are rejected upon the filing of a bankruptcy.  See “Why Do We Need the Student Loan Management Program?  Court Connection Vol. No. 8 – Issue No. 4, October 2019

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Christie_1Prior Student Loan Sidebars have addressed the specific guidance and programs available to help with student loans in bankruptcy.  Some of these features include:

Enrollment in an Income Driven Repayment Plan rather than allowing ED to simply place student loans in a capitalizing forbearance during a Chapter 13 plan. We can do that here in Florida by using the Student Loan Management Program (“SLMP”).  Someone can come out of bankruptcy with years of IDR (Income Driven Repayment) credit toward forgiveness rather than huge balances owed on student loans.

Taking this one step further are new rules that allow a Chapter 13 bankruptcy plan payment to automatically count as an income driven plan payment.  That would allow a consumer to use high medical, mortgage, rent or child care costs when determining a student loan payment amount.  Basically, the holy grail next to a full discharge!  This is stalled by the SAVE injunctions and we don’t know yet whether it will take effect or not.  It does offer simplicity and court guardrails which is good.  It would require little to no effort by the Department of Education – all features that are good in a Trump administration.

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