Defaulting on student loans has different consequences than defaulting on other types of debt. Generally, debt falls into two categories: secured debt and unsecured debt. Secured debt is a loan that uses real property as collateral. For example, a car is collateral for an auto loan, and a house is collateral for a home mortgage. So, if you default on an auto loan, your car can be repossessed, and if you default on a home mortgage, you can face foreclosure. Unsecured debt is debt incurred without collateral. Examples of unsecured debt are most credit card bills, phone bills, and medical bills.
When a debt collector comes calling for unsecured debt, he can’t threaten to garnish your wages, take your car, freeze your bank account, or foreclose on your home. It’s a violation of the federal Fair Debt Collection Practices Act for a debt collector to threaten legal action unless the debt collection agency has the means and intention to do so. If a debt collection agency does take you to court and obtain a judgment against you, you could have your wages garnished or your bank account frozen.
So, where do student loans fit in? Student loans are unsecured by real property, but the U.S. Department of Education can trip up those whose student loans have defaulted.
Statute of Limitations
Each state has a statute of limitations, after which time a debt is not legally enforceable. For example, California’s statute of limitations is four years. For regular unsecured debt (like credit card debt), a debt collector can’t take you to court after the statute of limitations has run out. With student loans, however, there is no statute of limitations. The federal law takes precedence over state law, and federal law says that the clock never runs out on student loan debt.
Bankruptcy
Chapter 7 bankruptcy is meant to wipe the slate clean and give you a fresh start. Credit card debt, medical bills, leases, and judgments are typically discharged, and you’re under no obligation to pay them. When it comes to student loans, though, bankruptcy doesn’t usually apply. If you filed for bankruptcy after October 8, 1998, chances are good that you’re still obligated to repay your student loan. Typically, the only exception is if the court granted an undue hardship ruling.
