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Having a bankruptcy flagged in your credit file can make obtaining a credit card, taking out a car loan or applying for a home mortgage a nonstarter for years. It can also affect your ability to land a job.
Yet in a move that’s certain to be scrutinized, the Obama administration is weighing whether to loosen bankruptcy laws so some borrowers drowning in student loan debt could unload those burdens and start fresh.
The proposal is included in a recently unveiled White House initiative called the Student Aid Bill of Rights, which is aimed at providing more protections for federal student loan borrowers.
The initiatives, including a new online outlet for filing loan complaints, come amid growing concerns about the debt that college students are carrying after graduating. The average amount of student loan debt for 2013 college graduates was $28,400.
Unlike most debts, federal law prohibits student loans from government and private lenders from being forgiven in bankruptcy proceedings, except in cases of undue hardship. Even in those rare situations — and there are fewer than 1,000 people a year trying to get rid of student loans through the courts — a bankruptcy action can be expensive and cumbersome.
But the Student Aid Bill of Rights directs government officials to explore the possible expansion of bankruptcy options on federal student loans. No details have been released.
Why has the idea been floated?
“To make sure that more and more young people can afford to go to college and then afterward aren’t so burdened with debt that you can’t do anything else,” President Barack Obama said in a speech earlier this month at Georgia Tech University, where he unveiled the proposal.
Any bankruptcy law changes would have to be approved by the Republican-controlled Congress, so substantial pushback is likely.
One possible scenario, according to financial aid experts, is to allow borrowers with private student loans from financial institutions to take bankruptcy.
That’s a small subset — only about 10 percent of student loans are made by private lenders, according to the Credit Karma online financial services firm.
Given that bankruptcy can be one of the most negative items pinned to your credit report for as long as 10 years, why make it easier to enter the system, even as a last resort? What’s the incentive to fight to stay current on student loans if the problem can be wiped out in one fell swoop?
Better for former students to focus on a host of flexible repayment options and even loan forgiveness programs that have been expanded in recent years. Also, don’t forget that many credit counseling services provide free loan restructuring advice.
Other aspects of the new Student Aid Bill of Rights plan could ease the pressure on student loan borrowers and clamp down on lending industry repayment practices.
For example, the plan directs the U.S. Department of Education to create a website by July 1, 2016, so borrowers with federal student loans can file complaints about lenders, servicing companies, collection agencies, and colleges and universities.
Another benefit of the new program applies to borrowers who make higher monthly payments than required. Under the plan, the loan servicer will have to apply the extra funds to the student loan with the highest interest rate, unless directed otherwise by the borrower.
There’s another way to deal with all this student debt — one that gets lost in the policy debates.
It starts long before the kids head to college and involves a family discussion about money — the cost of attending college, the importance of picking schools that are not financial stretches, zeroing in on a degree that balances with the cost of education and understanding that paying back debts even a little at a time requires commitment.
Over the past 25 years, the way individuals communicate with each other has changed dramatically. From telephone calls and faxes to emails and text messages, advancements in technology have made it much easier for individuals to get in touch with one another. Today, individuals communicate through text messages and emails more than they do through telephone calls. Businesses have also adapted to new communication preferences and developed strategies that allow consumers to be contacted through their preferred choice. However, when it comes to debt collection, debt collectors still operate under a set of laws from 1978 that haven’t caught up with the technological advancements of the last couple decades, making communicating with consumers through email not nearly as easy as it should be.
The reality of today is that consumers who have an account in collections want two things: to communicate with debt collectors through the method of their choosing, and to communicate with debt collectors at a time that is convenient for them. Because of the laws debt collectors are regulated under, some debt collectors will not communicate with consumers via email while some will. At the end of the day, whether or not a debt collector communicates with consumers via email is determined by their business and the risk decision the organization makes. There is no clear right or wrong answer in regards to debt collectors communicating with consumers through email, but there are certain aspects of the process that a consumer should consider when doing so.
1. You Should Make First Contact
Most debt collectors will not initiate the first contact with consumers through email. Therefore, if you want to communicate with a debt collector through email it is important for you to send the first email to start the chain.
There are times when the first contact may be by telephone and during that conversation the consumer may express their desire to be contacted by email. Nowadays, most debt collectors record all phone calls so they retain that authorization through recordings, but it is also not uncommon for the debt collector to request the consumer send that initial email anyway so they know for certain who they are replying to. This process also ensures the debt collector has taken proper procedures to communicate with only the consumer of record.
2. You Must Identify Yourself
It is important that consumers clearly identify themselves in the email by providing the debt collector with their full name, address, and either date of birth of last four digits of the Social Security number. The reason why these identification measures should be taken is because before the debt collector engages with a consumer, they are required to take appropriate steps to ensure they are speaking with the right person. Until they confirm they are speaking with the right person, it is highly unlikely the debt collector will engage in resolution of the debt by email or phone. Keep in mind that sending sensitive personal information via email carries its own security risks, which you should seriously consider before sending information digitally.
3. You Shouldn’t Expect Many Details
While some debt collectors have become more comfortable over the years communicating with consumers through email, all debt collectors still have reservations about doing so because there is no clear cut rule or law governing electronic communications in an attempt to collect a debt. Therefore, some debt collectors will utilize email to respond to and provide direct and clear requests, but don’t expect them to engage in any back and forth conversation like they would in a phone call.
If the exchanges become more complex or if there are more than a couple of emails back and forth, it is not uncommon for debt collectors to let consumers know they will cease emails and request to be called at the office to complete the resolution of the account.
4. You Should Avoid Emailing From a Work Account
Most companies have safeguards and policies in place requiring work email accounts to be used for work-related purposes only, and that they may be monitored and reviewed by the company at any time. So be careful if you decide to contact a debt collector through your work email because your personal business matters may get uncovered during routine work email account audits. Furthermore, some debt collectors will not communicate with consumers through the consumer’s work email account in order to protect the consumer’s privacy.
In the end, the number one goal for debt collectors is to help consumers resolve their account. So it is important to debt collectors that they communicate with consumers in the method that the consumer chooses and at a time that is most convenient for them as well. However, because of dated regulations, debt collectors are generally still leery about fully embracing email to handle the entire debt collection process — and those who do may ultimately be conservative in their approach.
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