I Can Afford to Pay My Private Student Loan But the Lender Won't Let Me
Posted July 11, 2016
My family and I are in California. When I went to college, my parents co-signed for my private student loans. I graduated, got a job, and made payments towards my student loans in a timely manner.
My parents made the decision to file for Chapter 13 bankruptcy in 2012. Unfortunately, their lawyers were ill-informed and said the bankruptcy would not affect my student loans or me as they would not be discharged. They were under the impression that I would still be able to make payments with no issues.
Shortly after the filing, my student loan account was disabled. I called the company and it was clarified that as a result of the bankruptcy filing they could no longer ask for payments because of the automatic stay. My parents called the lawyers, and again, ill-informed, they said not to worry about it as the student loan will "return to normal" once the bankruptcy closes.
Later, I read in the private student loan contract that bankruptcy resulted in automatic default. My credit report remained clear until the bankruptcy closed in 2015. The loans showed up as defaulted started when the bankruptcy closed in 2015. I started to received debt collection notices. Full repayment of the private student loans was demanded. I was advised not negotiate the debt and to wait until the four year statute of limitations for California runs out in the hopes that the debt collectors don't attempt to sue beforehand.
I still cannot believe the situation that I am in. I was perfectly capable of making my monthly payments. If the private student loans cannot be discharged, why could I not make any payments? I knew they were not going to disappear. It seems absurd that while the private student loan could not be discharged with the bankruptcy, the loans would be defaulted as a result of the bankruptcy and that repayment of the private student loan in full would be demanded. I feel like I'm stuck in a loop. At this point, the only light I see is waiting for the statute of limitations to run its course.
Is there anything in my situation that I am missing that would help rectify my situation in any way?
For California, does the 4 year statute of limitations start when the bankruptcy closed (2015) or when the bankruptcy was initiated and the student loan company stopped accepting my payments (2012)?
Does it take 7 years for this default to roll off my credit report and if it does not at that point, can I contact the company to have my credit report corrected to remove it?
I think you nailed the whole issue with your personal experience. Is it ridiculous, you bet it is.
But this is not a new situation. It's been an insane reality for a long time.
So if we put this into perspective the reality is the private student loan lender required the co-signer because they didn't feel you had the capacity to repay but then accelerated the note for the least likely person to pay from the very beginning.
This is yet another example of often times logic and creditor policies seem to live in different universes.
The Consumer Financial Protection Bureau said in 2014, "Students often rely on parents or grandparents to co-sign their private student loans to achieve the dream of higher education. When tragedy triggers an automatic default, responsible borrowers are thrown into financial distress with demands of immediate repayment." At that time CFPB Director Richard Cordray said, "Lenders should have clear and accessible processes in place to enable borrowers to release co-signers from loans. A borrower should not have to go through an obstacle course."
So the reality is you are facing an obstacle course. While you could send in a payment it would potentially impact the Statute of Limitations (SOL). And the SOL is a really boring but interesting topic. For example, in Nebraska, the SOL runs while in a Chapter 13 bankruptcy. It really depends on state law and there is no way I could even give you a good answer about what California says on this subject. You need a local expert who is also a licensed attorney in the state.
For something like this I would look at one of these resources to find an attorney who might be able to definitively answer the SOL issues in California. Consider contacting one of these attorneys in California, one of these student loan attorneys, or this group.
The situation you are facing is one created by a failed policy and procedure as a result of crummy terms from when the loan was originally offered and accepted.
So to correct the situation now would require the private student loan lender to either convert the defaulted and accelerated note to a regular loan in good standing without the penalty rate and added collection fees, or a plan for you to wait out the SOL and then discharge the private student loan in a bankruptcy.
It's a mess, it's stupid, it's been broken for a long time, and your ultimate course of action should be based on factual data and a well thought out plan of attack.
It's unfortunate the bankruptcy attorneys in 2012 didn't give better advice on this topic. But in their defense, it was an evolving topic and the lack of good information about this problem led many to give incorrect advice.
Now I know it is of absolutely little comfort but you are not along in this cesspool of the insane private student loan realities.
This article by Steve Rhode first appeared on Get Out of Debt Guy.