Question: I am unemployed, owe a fortune in student loans, and $2000 in credit cards with two debt collection agencies. I live rent free with my family. There is no way that I can pay $100 per month to settle one of the debts, which is what they want from me to stop calling. Other debt collectors also call me every day. I don’t have the $2000 that a Bankruptcy attorney quoted me.
Bankruptcy court will approve the discharge of student loans only if you satisfy the “undue hardship” standard, which requires a special procedure to be filed in Bankruptcy Court. That can be expensive and there is no assurance of a favorable outcome. For a large amount of student loans, however, it may be worthwhile if you hire an experienced Bankruptcy Attorney, who evaluates your case and determines that you will likely prevail at such a hearing.
Many federally guaranteed student loans can be discharged in other ways that may have a more favorable standard depending on the circumstances and type of loans. For instance, if you are disabled and the loans are either FFELs, direct, or Perkins loans, you may be qualify for a disability discharge, which merely requires you to file the form, signed by a physician, that you qualify for total and permanent disability, including the medical diagnosis and why this prevents the borrower from working. There is no cost for this application. More information is available online from Student Loan Borrower Assistance and the U.S. Department of Education. There are other statutory loan discharges, such as for a closed school or if the school falsified eligibility. If a statutory discharge is sought and fails, perhaps bankruptcy can be a backup plan.
I have seen debt collection lawsuits filed against my clients for with under $1,000 in principal balance due. I would not assume that this debt collection agency will not sue to enforce either or both of these debts. However, why would they sue you if you are not working and have no assets or income? To file a debt collection lawsuit in California, the debt collection agency must hire a licensed California debt collection attorney, then pay the court’s filing fee and pay to have a process server deliver the documents to each defendant. These costs and fees can be added to the total debt, but if a collection lawsuit pushes the debtor to file bankruptcy or if the debtor is long-term unable to pay, then the debt collection agency has made a poor business decision to invest money on a debt that will not be recovered.
If the debt collection agency waits too long to file a collection lawsuit, then the debt becomes time-barred by the statute of limitations. From that point on, the debt collection agency cannot file a debt collection lawsuit, without risking having the case dismissed as untimely and risking being sued for violating the Fair Debt Collection Practices Act (FDCPA). The debt collector may not even threaten to file a lawsuit on a time-barred debt, without violating the FDCPA. Thus, please read my prior blog posting on the “Don’t Pay A Dime Strategy” as an alternative to bankruptcy.