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The Consequences of the “Do Nothing” Reactive Approach to Defaulted Private Student Loans

Head in the sand
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This is a topic that has been on my mind lately after several recent discussions I have had with private loan borrowers. The approach is nothing new when it comes to debt, and it consists of doing, well – nothing. There are different variations of this approach – “watch and wait”, “stick your head in the sand”, or “react/panic when danger is imminent”. As a certified credit counselor, I only advocate the “watch and wait” approach for very specific situations – such as when there is the high probability that a debt has passed the statutes of limitations for a collector to file suit, and/or the loan is off of a credit report (as long as a judgment is not involved). This still involves a proactive approach – the “watching” part of “watch and wait”. The borrower opens mail and monitors calls, while still trying to stay off the radar.

With some lenders this works, with many others – it doesn’t. Different variables including the size of the loan, the aggressiveness of the particular lender or collector, the amount of time that has passed, whether there is a cosigner with visible equity on their credit report, etc. can all influence a lender’s decision to pursue legal action. Completely ignoring everything and hoping nothing happens (the head in the sand approach), or the panic and take emergency action when a legal threat arises or has already taken place (lawsuit/judgment/garnishment/lien), are two variations of this approach that I never recommend, ever.

However, there are no hard and fast rules when it comes the do nothing approach. Sometimes, it’s a coin toss. Other times, there’s a pretty decent probability that nothing will be done (for instance, no lender will sue over a $100 medical bill). And in some cases, it’s a certainty that legal action is only a matter of time (such as with a six figure private student loan that goes into default).

In this post I’m going to discuss 3 separate real life scenarios of borrowers who I’ve spoken with who have decided to take this reactive approach; and one scenario of a borrower who took a proactive approach.

Scenario 1 – Trying to outrun wage garnishment while doing a little monitoring

The first approach was someone who we had considered taking on as a client – they had a judgment. The account was no longer showing on their credit report, but the creditor (an aggressive and litigious private lender) had previously won a judgment via lawsuit – years ago. But judgments can be renewed, and the bottom feeding law firm collection agency had done just that, and recently.

The borrower was taking somewhat of a combination of the three variations of the “do nothing” approach – they were trying to not pay the debt at all, but monitoring court filings in their county, and hoping that the lender would just forget about it and not find out where they worked. A wage garnishment would have likely been the only forced collection effort available to the lender unless they were able to obtain a bank levy, which is usually more difficult to execute than locating where someone works and executing a garnishment. The borrower did not have any property for the lender to get a lien against.

From monitoring court filings, the borrower was under the impression that the lender was closing in on a wage garnishment and finding out where they worked – this led them to seek me out to negotiate a settlement and a satisfaction of the judgment. This person had not consulted with an attorney at any point – when they were served the summons years ago, when they received the default judgment (also years ago), when the lender renewed the default judgment, or at any point after. This turned out to be a big mistake.

I can settle judgments, and have before – if there is no forced collection activity. However, waiting until the lender sues, letting them win a judgment, and then settling is not ideal. When forced collections are already in place, it’s impossible for me to settle as that requires an attorney. And it turned out that despite checking court filings, the borrower in this scenario had missed a wage garnishment order that had been put in place several months prior to them contacting me – which neither I nor the borrower knew about, until they hired us and we did further research.

My partner and I knew at that point that the situation had turned from a non-legal negotiation to a legal matter requiring a student loan defense attorney. I know many excellent student loan defense attorneys and referred this borrower to the best one I knew of in their state. However, I don’t think anyone really enjoys litigation or having to hire an attorney. On our side, we did hours of work for nothing – we did not settle the debt (we usually can’t if there’s an active garnishment order in place) and therefore were prohibited from charging anything, despite the amount of work that we did. As a small business owner, I obviously have to try to minimize or avoid scenarios where I work for free if I want to continue to keep my business open. My partner commented that if this person had only contacted us 6 months ago, we could have negotiated the settlement.

There are always ways to avoid lawsuits on a defaulted loan if proper planning is in place.

A Proactive Versus Reactive Approach

The main problem with the scenario above and the reactive approach that the borrower took is that it is highly risky. My negotiation method is designed to minimize risk and maximize savings. I know which private student loan lenders sue quickly and which ones don’t. I know when we can grind out a negotiation for months to get a better deal, or when the best savings and least risk come from settling in the first month or two after default.

The attorney the borrower hired in the above scenario is going to have to backtrack through a lot of legal paperwork and play defense first – then work out a payment plan or settlement – and possibly even find some flaw in the case, looking back through the process service documents or other mistakes the lender may have made in the initial lawsuit or the renewal of the judgment. This type of legal work will not be inexpensive.

A better approach would have been to hire a good student loan lawyer the day that the borrower received the summons – when there is usually less than a month until the lender automatically wins a default judgment, if no other action is taken.

But the best approach in my opinion would have been to settle long before legal action was even on the horizon. Once an account gets to a collection attorney licensed in the borrower’s state, they have more leverage because they have the capability to file a lawsuit – and they will certainly use the full reputation of a law firm to scare the crap out of the borrower to try to get them to settle, enter into an unnecessary consent judgment, or use other bottom feeder legal trickery to overpower a borrower who does not have legal representation or a negotiator who is familiar with these tactics. Settlements with collection law firms will also generally be higher than they would be with a non-attorney debt collector or an internal collection department.

The best time to settle to maximize savings and minimize risk varies greatly depending on the lender and other variables, and those who go at it on their own are essentially going into such situations blind, with no way to know whether the (likely highly skilled and persuasive) collector on the other line is bluffing, talking tough, or speaking the truth.

With one particular private loan lender, the best settlements and least risk on larger accounts come immediately after default. With that lender, smaller accounts sometimes bypass their legal collections mechanism and can age for years, resulting in very low settlements (still a risky approach as I have seen this lender file a lawsuit on an account as small as $4,000).

With another private lender, they almost lull the borrower into a fall sense of security by making multiple non-legal collection placements for months and months after default. Then, boom – all of the sudden the account is with a collection law firm licensed in the borrower or cosigner’s state, with the full intention of filing a lawsuit even on a small balance.

This is inside knowledge that does not exist anywhere on the internet, as far as I know, and is based on information and trends that I have personally learned over hundreds of hours of negotiations and research over my 10 year career as a debt negotiator. These trends can also change – I have seen two drastic changes with two major private loan lenders in the last year.

For example, Discover, who used to settle at 50% or sometimes less; is now taking a much more hardball approach (which I will discuss in detail in an upcoming video blog). Lenders can change trends and tactics on a large or small scale at any time – and they don’t exactly call me to tell me when that happens. I learn this information through tidbits by talking with different borrowers (clients or evaluations); tips from friends in high ranking positions in the collection industry, discussions with student loan lawyers or other negotiators, or during direct negotiations.

Scenario 2 – Gradually deciding to take a reactive approach after an initial proactive approach

This one is my least favorite, because this person actually became a client of mine for over 3 years, and I spent hours upon hours working for them. On my birthday in 2015, I drove 3 hours round-trip to meet them in person since they lived in my state at the time. This person had multiple credit cards and large balances on private student loans, and we had a good consultation.

Although technically, I could have charged for an in-person consultation, I didn’t – because I fully believe in the performance based approach even despite that loophole. I left the consultation feeling like I had signed on a great client who was taking a very proactive approach to settling out their debts. We went over each account, the likely timelines involved, funding, which lenders were going to be aggressive early on, and which lenders we could grind down over time. This client then moved overseas for a job, still saying that they wanted to settle but that they wanted to take some more time. I repeatedly urged them to send letters to their lenders informing them of their overseas address, so that the lenders would not try to send them a summons to court at their old Ohio address and potentially get a default judgment. I don’t know if the client ever did that.

They fell off the radar for a while, and then I received an email from them stating that they were moving back to the US and wanted to go over settlement again. I re-evaluated balances, funds, etc and the borrower then fell off the radar again and did not return my communications. A year later, they resurfaced again; saying something about how they had read on the internet that “the best time to settle is after 7 years”.

It most certainly is not – legal action can happen before then, and often does; and if an account does make it past SOL and credit reporting guidelines, it is what I consider a “neutered” account – the lender is unlikely to take action after SOL (although some still try, and many things can reactivate SOL), and the account is off the credit report – so there is no real benefit to settling after the 7 year credit reporting timeline has passed. It’s throwing money at an old debt that will not have any direct benefit to the borrower. But what this also told me is that the borrower was no longer following my advice as a client, and was instead getting confused by misinformation on the internet from some questionable source.

I reminded this person that they are only 3 years into their defaults, that they are likely well within the statutes of limitation, and that they would have to wait 4+ more years hoping that none of their multiple lenders would sue (all while enduring a completely tanked credit score) until anything would start to fall off of their credit report.

As I mentioned earlier, I don’t recommend a reactive approach to defaulted private loans – especially on large balances – but if it’s the route chosen, the ethical thing to do is to make this decision prior to hiring a negotiator or credit counselor and before hours of work are done on the borrower’s behalf.

The no-upfront fee rules are in place for a reason – there have historically been many bad actors in the debt relief industry (and still are); but on the other side, it’s unethical to get a small business to put in hours and hours of work without the intention of actually settling. I understand circumstances change, and fund availability changes, but I work with clients in good faith and my expectations are that they will do the same with me.

If you’re going to take the coin toss approach, please make that decision before hiring someone who is bound by regulatory no-upfront fee rules and cannot charge consultation or hourly fees.

Scenario 3 – An extensive evaluation, a game plan, the certainty of a lawsuit – and then a decision to do nothing

In this instance, I had an extensive (over 2 hours total) evaluation with a couple who each had six figure private student loans with a lender who absolutely will sue on six figure balances shortly after they default. They were each inevitably headed toward default, unable to make the staggering payments required on each of their balances; with the lender (as is often the case) offering no real options for pre-default relief.

We went over different funding scenarios – they did seem to have some funding availability, but we would have had to put in place some advanced “holding” strategies to buy time for those funds to be available. As is the case with many large balances, the sale of an asset or withdrawal from a 401k or retirement fund would be necessary to cover the settlement, even with the massive reduction that I would have been able to negotiate – but there did seem to be access to this kind of funding from my conversations with them. I went over various strategies, holding patterns I could implement, the timelines to expect – and then got a one sentence email the day after my last phone call with the borrower. “We have decided not to do any negotiations on our accounts”.

Okay.. a logical and objective analysis showed that to be the best approach, but I at least hope that they aren’t taking a completely reactive approach. My last bit of advice to them after the one sentence email was to begin researching student loan lawyers in their state. Not to scare them – but I know for 100% certainty that this lender (Navient) would sue them within 6-12 months of the default – or even less (I have heard of it happening in as little as 2-3 months after default on large balances). As a negotiator, you always wonder what happens in cases like this – did they hire an attorney prematurely? You don’t need to pay an attorney an upfront retainer to settle a debt or represent you unless you’re actually facing legal action.

Did they fall for a scam “dispute/validation” debt relief pitch?

Did they hire a bankruptcy attorney who would unscrupulously roll their loans into a 5 year Chapter 13 without getting them discharged and causing the balances to balloon even higher?

Or are they just doing nothing and hoping Navient won’t hone their best collectors and agencies in on a six figure balance?

I have no idea – I haven’t heard from them since.

Sometimes, after these kinds of calls, I do get a call again months later – “Help! I’ve received a summons to court! Can you negotiate for me now?”.

Well, no; unfortunately.

I’m not an attorney so I can’t file the type of legal response that is necessary to prevent the default judgment from occurring (usually 20-30 days after receiving the summons). And I’m prohibited from even trying to do that – it’s considered providing unlicensed legal advice. So at that point, when a lawsuit occurs – there is still room for negotiation (usually not as good of a deal as would be obtained prior to lawsuit), but there is also a separate legal process that has to be addressed – by a skilled student loan defense attorney (who will charge an upfront retainer before any work is done).

Scenario 4 – Watchful waiting, monitoring calls and letters, and taking action as soon as the barbarians were visible from the castle lookout

In this scenario, the borrower just didn’t have the funds to settle or do a payment plan; and they knew that the lender was litigious after talking with me. They monitored all phone calls, and told their cosigner to do the same – as well as opened all their mail. As soon as the cosigner received a letter from a collection attorney licensed in their state, they reached out – and a plan was put in place to make payments until the borrower could save funds to settle. This is a proactive approach – the kind that reduces risk and gets results. It’s still better to be even more proactive and settle before assignment to a collection attorney, but that just wasn’t an option for this borrower due to funding issues. So they took the next best strategy and are now going to avoid the headaches illustrated in the previous scenarios.

I often use the analogy that ” the barbarians are at the gates” when someone is facing an imminent lawsuit or assignment of a loan to a collection law firm. This is a red flag and a sign to take action. But this person spotted the barbarians when they were still far from the castle walls, so to speak, and fired off a volley of arrows while the warriors inside prepared for battle. This is how you handle a collection law firm – not by letting them get a judgment and trying to run from it, and not by ignoring a delinquent six figure account that will inevitably end up in litigation if no proactive approach is taken immediately before or after default.

There’s no reason to live in fear or let private student loan debt pressure you or weigh heavily on your mind every day. This month, I’ve been contacted by the families of two borrowers who committed suicide because of pressure from their student loan debt and other financial problems – the two hardest calls I have ever taken. Defaulted student loans and the accompanying collection activity, when not resolved, causes serious mental pressure; strains family relationships, and can sometimes contribute to very harmful behavior and decisions.

There are always options, and I am extremely creative, adaptive, and flexible when it comes to strategic student loan settlement planning. If you’re interested in settling your private loans, it’s always better to be proactive. Contact me today for a free evaluation – you have nothing to lose, and even if you decide not to hire me; you’ll gain a lot of information about your specific situation and lender that you won’t find anywhere else on the internet (except maybe in some of my other blogs).

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