Is now the time to challenge defaulted Federal student loan debt?

Educational Credit Management Corporation, the main private entity hired by the U.S. Department of Education to pursue and collect defaulted student loans, is under fire for overly aggressive litigation tactics against debtors who seek to discharge student loans through bankruptcy proceedings, reported Natalie Kitroeff of the New York Times on Thursday, January 2, 2013.

The United States First Circuit Court of Appeals, The Honorable Norman H. Stahl presiding, sanctioned ECMC for abusive and aggressive collection tactics in 2012, stemming from a bankruptcy case filed in 2004 and completed in 2010.

Ms. Kitroeff also referenced the 2012 case of Karen Lynn Schaffer, age 54, who could no longer continue paying on student loans taken out to help her son through school when her Hepatitis C flared up and disabled her from working. ECMC claimed in court filings opposing her request to discharge the student loan obligation that she had overspent dining at restaurants. She had spent $12 at McDonalds to purchase a meal for both she and her husband.

ECMC came into being in 1994 after the main collector and backer of student loans at the time collapsed from too many defaulted student loans. ECMC was armed with new and powerful collection tools including the ability to easily garnish wages, social security income and intercept Federal tax refunds.

Default rates dropped from some 22% in 1990 to just 10% in 2011. However, bulldog tactics and endless litigation are part of the game.

Emory University’s Professor Rafael Pardo called the agency’s tactics a “war of attrition, death by a thousand cuts.”

ECMC has worked to try to “change the rules” on bankruptcy discharge of student loans. ECMC has pushed courts to adopt a standard that is stricter than the normal “undue hardship” test which utilized by many courts.

ECMC has adopted even new tactics to make it tough on borrowers. ECMC claims that if defaulted borrowers can qualify for an “income contingent repayment plan” acceptable to the standards of ECMC, then any bankruptcy student loan discharge requests should be denied. The problem is that such repayment plans stretch on forever with no light at the end of the tunnel and little hope of credit score recovery. The company goes to great lengths to ensure that almost everyone “qualifies” for so-called “income contingent repayment plans”. The result is almost life-time indebtedness for the borrower.

There’s another aspect to any student loan debt that might be forgiven. An “income contingent repayment plan” that forgives part of the debt may create taxable income for the debtor who receives the benefit. The larger the forgiven amount, the larger the problem for the debtor. While arguments supporting a request that the IRS not view the forgiven portion of the debt as taxable income could be made in some cases, even making these arguments through a costly professional could be expensive, difficult and have no guarantee of success. Points like these were raised by Ms. Schaeffer’s lawyer, according to the New York Times story.

While the Federal Court of Appeals for the 8th Circuit has signed off on the approach argued by ECMC, other circuit courts have not. The State of Washington is located in the 9th Circuit.

Want to get rid of some student loans? Having significant health and family problems? The spotlight on the ECMC could be the signal that today is your day to file a Chapter 7, and to seek a discharge of your student loans.

If you have any questions about student loans and how you might go about discharging them through bankruptcy, please contact me at your earliest convenience.