Step 1: Verifying Hardship
First, along with experiencing education fraud, the distressed borrower needs to be in a state of hardship, meaning the ratio of debt to the amount of income earned is lopsided in such a way that the payments demanded by the creditor are impractical. One way to check for hardship is to divide the total student debt (private and federal) by the amount of yearly gross income. If that number is higher than 40%, the borrower would be considered in hardship.
Step 2 – Deciding To Stop Paying Creditor
Next the borrower has to decide if they want to continue paying the creditor or not. When the borrower is paying, creditors will never take any hardship situation seriously and keep demanding payments. The reality is, if the borrower is truly in hardship due education fraud, they would not be able to make the payments on the debt.
Step 3 – Send A Letter To Creditor Stating Hardship Case
It is also a good practice to send a letter in to the creditor stating the nature of education fraud and hardship that is being experienced and that the current structure of the loan is not something that can be paid on.
Step 4: Understanding The Creditors Reaction
Each creditor reacts to a hardship case in different ways.
Even when the borrower stops paying, some creditors will not believe there is a a hardship situation and use aggressive and bullying type tactics to try and collect. Especially if they know if the borrower is managing this process on their own. Not only will they harass the borrower, they will call the cosigners and any body else they can find that may be related. However, with some knowledge of the Fair Debt Collections Practices the borrower can verbally and if necessary in writing, get the creditor to stop the harasssment.
If intimidation does not seem to work to get the borrower to take action, some creditors may take it even further and threaten legal action. Usually this is just a threat and they use a lot of legal jargon as a scare tactic. However, even if they do sue, if the borrower is truly in hardship and went through education fraud, they will most likely have a favorable outcome in court.
In other cases, the creditor may decide it does not want to deal with the debt anymore and will sell the debt off to a collection company. Although being in collections sounds bad, it is actually a good thing. In many cases that creditor has sold the debt to that collector at a deep discount, thus improving the borrowers chances of getting a reduction on the debt.
If done correctly, usually 6 months to 24 months after the borrower has stopped paying on the debt, the creditor will start making offers. Having experience in this area can go a long way in getting a favorable outcome.
Step 5: Understanding How Much Can Be Saved
How much can be saved varies on the education fraud and hardship level and the expertise of the person negotiating the debt reduction. Although it may be easy for the borrower to know what kind of hardship they are going through, the lender will still try to negotiate for their best interest. In some cases a borrower may accept a 10% reduction, when an expert negotiator could have gotten much more. Knowing consumer laws and how to deal with the creditor is key to negotiation success.
In addition, it is also recommended to have some money saved up as a negotiation tactic and to show you are serious about the new arrangement.
A good settlement would be considered a reduction in interest by at least half, a payment plan that is affordable for the borrower and a 50% or more reduction in debt. An average one would a 30% reduction in debt, some interest reduction and an affordable payment plan.
Step 6: Knowing The Risks Involved
Credit Score Risk
The one risk that every borrower is concerned about is credit score risk. For those borrowers that have already missed payments or are already behind on their payments, their credit score has probably already been impacted. For those current on their debt payments, there may be some impact on the credit score, but one has to weigh the temporary credit score impact against the long term financial gain.
The fact is, the negotiation usually takes less than 24 months and when that is complete and the borrower starts paying on the new terms, each payment made on under the new terms will have a positive impact on their credit score.
Borrowers who are concerned about their credit score because they want to buy a house or car should consider using the money they have saved for those items as leverage to negotiate their private student debt down even further, rather than taking on more debt.
For those worried about their credit score for rental or job applications, usually a simple explanation of why your student debt is being disputed is enough to get past that issue.
Not Getting The Deal In Writing Risk
Creditors are known for offering up deals that sound enticing to the borrower, but when it comes to finalizing the offer, they will not put it in writing. This is usually a tactic to get the borrower to start making some sort of payment. When they do offer something in writing it is advised that an expert or an attorney review the offer before signing.
Not Knowing Negotiation Tactics Risk
As mentioned, having knowledge of creditor negotiation and consumer laws can go a long way. When to take an offer and when to reject an offer is a slippery slope. In some cases rejecting an offer may cause more harm than good. If the creditor makes a favorable offer and the borrower rejects it, the creditor may move to legal action. Something that could have been avoided may now cost the borrower considerable time and money.
Getting Sued Risk
Earlier, the possibility of getting sued was discussed and this is a real possibility. The outcome can still be favorable when sued, but it is important for the borrower to realize, they will most likely need legal help. Most attorneys ask for a retainer and charge somewhere around $400 an hour. Most also don’t provide any guarantee on the outcome of your debt.