Does Filing Bankruptcy Stop Student Loan Offsets?
The United States Department of Education (DOE) has the right to confiscate your federal income tax refund if you become delinquent on your student loan debts. Student loans are some of the few loans that most bankruptcies can't eliminate, but filing bankruptcy may help you temporarily with your income tax refund.
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What Bankruptcy Does
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When you file for bankruptcy, all collection activity stops. Phone calls, letters, foreclosure and federal tax offsets are halted by court order. If you've filed for bankruptcy and the case hasn't been settled, you must issue an objection to the offset within 65 days from the notice date. If the bankruptcy dismissed the student loan debt, then the offset cannot take place.
Other Ways to Fight the Offset
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Bankruptcy isn't the only way to halt a student loan offset. If the loan is being repaid under a negotiated plan, the loan has been cancelled, paid or deferred, the loan is fraudulent or you've become permanently and totally disabled, then the offset is stopped. You must appeal the offset; it won't be handled automatically. There are other defenses, too. Fraudulent loans, refunds owed by the school and false loan eligibility are all adequate.
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The Government Strikes Back
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During bankruptcy, your trustee will negotiate a repayment plan with your student loan lender. Student loans are almost always repaid. The rare exceptions are if the borrower has died or became completely disabled and unable to work. Otherwise, be prepared for things to get nasty. The federal government has a variety of ways to get its funds back.
Alternative Methods
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If you haven't filed for bankruptcy and are struggling with student loan debt, be advised that the federal government can also garnish your wages, offset your Social Security income, revoke or disallow your professional licensing or sue you in court. Liens on bank accounts and property are common. Limits apply; the government may garnish a maximum of $217.50 per week from your paycheck or $9,000 of your annual Social Security payments. Nevertheless, don't wait for things to get this far. If you reach out to your lender and fully explain your situation, the likelihood of resolving your problem is much greater.
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References
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