How to Handle a Student Loan Lawsuit

Student debt continues to be a growing problem in the United States. A recent LendingTree analysis found that graduates in 2019 left college with an average of $29,900 in debt, a 2% increase from 2018. While millions of borrowers are burdened by hefty payments, not paying student loans can lead to even messier problems.

What happens if you don’t pay your student loans can depend on several factors, like how long you skip payments, whether your loans are private or federal and the statute of limitations on student loans in your state. In some situations, you may even find yourself facing a student loan lawsuit.

Federal vs. private student loan lawsuits

Whether or not you get sued for your student loans will depend on whether your loans are federal or private.

Federal

Since the government has several options to force you to repay, including wage garnishment or withholding tax refunds, it is uncommon for borrowers to see a lawsuit from missed federal loan payments. When you miss a payment on your federal loans, it is immediately considered delinquent. However, federal loans will not enter default for 270 days. At that point, the entire balance of the loan will be due, and that’s when you may start to see the funds disappear from your paycheck.

If you miss a payment because you cannot afford it, talk to your loan servicer as soon as possible to discuss pausing or lowering your monthly payment. It’s better to see what options you might have than letting the problem get worse.

Private

Private lenders, on the other hand, are far more likely to take you to court over a defaulted loan. While federal loans will not default until 270 days after the initial missed payment, private loans can be in default as soon as the first payment is missed (depending on the lender’s policy).

Even if you’re up to date on payments, there are other reasons your loan could go into default, including bankruptcy or the death of a cosigner. Once you default, you’re at risk of being sued by the lender or a collections agency. If they pursue legal action, you’ll receive a summons to appear in court.

What to do if you’re being sued for student loans

It can feel scary to face a lawsuit, especially if you’ve never faced one before. It’s important not to panic or ignore the severity of the situation. You can handle this.

Get organized

• Mark the date and time of your summons: This is one of the most important steps. If you fail to act by this date, the judge may enter a default judgment against you, meaning you’ve already lost the battle.
• Ask for verification of the debt: Contact the lender or collections agency to get the details of your debt and why it’s being collected now. The Consumer Financial Protection Bureau has sample letters you can use to make sure you’re covering all your bases.
• Do your homework: Before you make a plan of action, make sure you have all the facts straight, including who is suing you and why. You should also look up your state’s statute of limitations, or the amount of time a lender has to sue you after you default. The statute of limitations on student loans is different depending on where you live, but it can range from three to 10 years.
• Contact your cosigner: If the lawsuit is for a loan on which you have a cosigner, it is possible for your cosigner to be sued as well. You’ll want to contact them to see if you can work together to repay the loan.
• Consider hiring a lawyer: While lawyers can be costly, their fees may be lower than what you end up having to pay on the loans, so keep hiring one in mind. There are also no-cost or low-cost options. Even if you just have a consultation with a lawyer, doing so can help you be better equipped to handle the lawsuit.

Try to settle your debt with your lender

You might be able to avoid a court date by settling with your lender before the lawsuit moves forward. Just make sure you contact the lender or the party suing you as soon as possible to avoid missing your court’s deadline.

In this case, student loan lawyer Jennifer Weil recommends taking a hard look at your finances and assessing what payments you are able to afford in the form of a lump sum or monthly payment. You’re trying to estimate what you can offer your lender.

For example, say you’re being sued for $30,000 and you happen to have $15,000 in a savings account. You can offer to pay your lender or collections agency the $15,000 to settle your debt and avoid further legal action. In the same way, you can offer to pay $200 per month for a set amount of time as an alternative settlement arrangement. All arrangements are subject to your approval the approval of the lender or collections agency, which is why it’s important to know who is suing you. Weil says in her experience, some creditors are much more willing to settle than others.

If you should enter negotiations with the plaintiff and your date is approaching, you can ask their attorney to request that the judge not enter a judgment against you. If they decline, you will need to file an answer to the suit.

File an answer or motion

If you cannot afford to settle or cannot reach an agreement with your lender or collections agency, you will need to respond to the court by the aforementioned date. At this point, you will either be filing a motion to dismiss or answer to the lawsuit.

Weil says dismissals are rarely granted because a lot of judges want to see all the facts before ruling. “The only way to do that is to go through the discovery process, which kicks in after the answer is filed,” she said. “The discovery process allows for an exchange of documents and other facts. Many judges prefer to make decisions based on the facts.”

Your answer to the lawsuit needs to address each of the complaints against you and your possible defenses. This can be a simple printed document where you address each allegation. Send your answers both to the court and to the plaintiff’s attorney.

Pick a defense

Unfortunately, there aren’t many solid defenses against a student loan lawsuit. If you did not take out the loans and are dealing with a fraud case, you should absolutely get a lawyer and take the suit to court. If the debt is yours, common defenses include:

• The statute of limitations has expired
• The company suing you can’t prove the debt or is unlicensed to do business in your state
• The amount of debt owed is incorrect
• You paid the total amount of the loan, but the lender or collections agency isn’t current on their records
• You still have an outstanding balance on your loan, but you’re being sued for more than you owe
• The loan has been canceled, or the school you were attending closed

What happens after a judgment is entered against you?

A judgment will be entered against you if you fail to respond to the lawsuit or lose the suit in court. This judgment means the plaintiff now has other options to settle your debt, like garnishing wages or putting a lien on your property.

Note that state law generally has exemptions to protect your home or other important assets from seizure, possibly including your car and any work tools. There are also rules about how much of your salary can be garnished. Consult with your attorney — or a pro-bono advisor willing to counsel you for free — so that you know your rights.

Suffering a judgment against you is not an ideal situation, but Weil points out the benefit of facing a lawsuit is that it forces you to address the situation. For better or worse, you should walk away from the experience with a plan to get rid of your student debt. It might not be the prettiest plan at this point, but it’s a plan nonetheless.

Is bankruptcy an option?

Regardless of whether you explore bankruptcy before or after you’re faced with a lawsuit, getting your student loans discharged in bankruptcy is notoriously difficult. While filing for bankruptcy before you’re sued would prevent legal action, it does not necessarily improve the likelihood of your loans being discharged. Regardless of when you file, make sure you have a clear understanding of the costs of declaring bankruptcy to make sure it is the best option for you.

Bottom line: Be proactive

The most obvious method you can use to avoid a student loan lawsuit is to stay on top of your payments. If you know you’re approaching a potential missed payment, take action.

If you just lost your job or are hit with a huge emergency expense, it’s always in your best interest to talk to your lender or collections agency first and see what can be done. Pausing your loan payments in deferment or forbearance is better than skipping payments and trying to catch up or to quit paying altogether.

As soon as you miss a payment on your student loans you put your credit score at risk, which can lead to even greater financial turmoil well before you ever see a lawsuit. If you find yourself in a situation where you cannot payback your student loans or your monthly payments are too high, explore your options for refinancing. With private loans, your options for getting out of repayment are incredibly limited. But staying in communication with your lender or collections agency can help you avoid additional problems.

This blog does not provide legal advice. If you need legal advice, please contact an attorney directly.