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Here’s How to Beat Your Student Debt Collector

Dozens of borrowers have successfully defeated creditors in court. Maybe you can, too.

There are countless advertisements on the internet and late-night television promising the indebted an easy way out. Just spend a few thousand bucks, and poof—that debt is gone. For some types of student loans, this too-good-to-be-true scenario has proven out: Hiring an attorney can, in certain cases, get massively indebted borrowers out from under hundreds of thousands of dollars in loans.

The reason is as simple as it is astonishing: Some creditors trying to collect on private student loans haven’t been able to prove in court that they actually own the debt in question, prompting judges to let borrowers off the hook. There are real risks, however, even if the prospect of dodging a massive debt seems tempting. Here’s a guide to how it can work—and what happens if you fight and lose.

Why Student Debt Collectors Are Vulnerable

Thousands of Americans have been sued in the past few years for allegedly defaulting on student loans owned by a group of investment vehicles known as the National Collegiate Student Loan Trusts. These 15 trusts, created from 2001 to 2007, claim to own billions of dollars in private student loans, the type made without government backing. The trusts claim to have purchased the loans from banks and other lenders shortly after the loans were made to students. When debtors miss months of required payments, collectors working for these trusts initiate court proceedings to recoup the borrowed funds. 

Most of the time, the trusts are successful. A typical case might go like this: A borrower doesn’t show up to court, the trust gets a default judgment as a result, and the borrower is forced to pay off the debt—often a paycheck at a time—under a court order. For borrowers who lose these cases, the debt nightmare really begins.

But these cases can also be a way out of debt, as dozen of borrowers have found. All they needed was a bit of money to fund a legal gambit and beat back the debt collectors.

To understand why some Americans have successfully delayed or even canceled what seemed like an inevitable day of reckoning, it’s important to know that creditors generally can’t come after you unless they can prove you owe them money. The various National Collegiate trusts are having difficulty doing that, according to court records and debtors’ attorneys. (For more, read this Bloomberg Businessweek story from 2015 and a follow-up report this week in the New York Times.)

The reason has to do with the mundane business of transferring and storing paperwork—loan documents, promissory notes, and the like. When National Collegiate purchased loans from banks, it presumably had a record documenting whose loan it purchased, how much was owed, when the loan was originated, and other pertinent details.

But when it comes time for the trusts’ debt collectors to prove that ownership, facing down a delinquent borrower with legal representation in a courtroom, the records often turn out to be missing. Former students who readily acknowledge that they borrowed money from, say, Bank of America Corp. to pay for college are able to get debt-collection lawsuits dismissed by arguing that they never borrowed from a National Collegiate trust. If the trust can’t prove transfer of the loan with careful documentation, there’s no way to collect.

It’s an echo of what occurred when millions of Americans faced foreclosure proceedings in the aftermath of the financial crisis, when loan companies took paperwork shortcuts—“robosigning” is a popular term—to seize homes in what state and federal regulators say was against the law. Similar issues have cropped up in various kinds of debt-collection lawsuits, such as those involving soured credit card debt.

How to Get Out of Debt

David Addleton, an attorney in Macon, Ga., said he’s represented at least a dozen clients who were sued by various National Collegiate trusts attempting to collect on defaulted student debt. Every case was dismissed before trial.

“All they care about is getting a default judgment,” he said of National Collegiate’s debt collectors. “All you have to do is show up and defend. They always dismiss.”

Addleton charges his clients 10 percent of the face value of the debt, he said, which typically ranges from $30,000 to $60,000. Borrowers have to pay regardless of the outcome of the case.

Here’s what typically happens when attorneys representing National Collegiate sue a delinquent borrower. When the lawsuit is filed, the attorneys produce a copy of the borrower’s promissory note and documents that claim the loan was transferred from the original lender to a National Collegiate entity, according to a Bloomberg News review of court cases across a handful of states. The problem for National Collegiate is that the documents allegedly showing the transfer don’t actually state whose loans were transferred. The pages that list which loans were transferred are often blank. (Here’s an example.) 

In cases filed in Ohio, Georgia, New Hampshire, and Kentucky, among other states, judges have sided with borrowers when they’re forced to rule on whether National Collegiate entities in fact own the alleged debt, because the trusts can’t show that the particular borrower’s loans were transferred to National Collegiate.

In some cases, debt collectors working for National Collegiate swear upon penalty of perjury that they’ve reviewed the underlying documentation and that it shows the targeted debtor’s loans were transferred to National Collegiate. Sometimes it works; other times, like in one California case, it doesn’t. The federal Consumer Financial Protection Bureau has been investigating the issue since at least 2015, agency records and court documents show. (Cognition Financial Corp., which created the National Collegiate trusts when it was called First Marblehead Corp., didn’t respond to a request for comment.)

Borrowers who successfully get the lawsuits dismissed generally can be sued again within a certain time frame established by each state. After the statute of limitations runs out, borrowers are effectively in the clear.

What Happens If You Lose

For Addleton, borrowers now have every reason to test the documentation underlying private student debt. “No one should agree to pay these people one penny,” he said.

But if you can afford to make your payments, this strategy probably isn’t for you. First, deliberately defaulting on your debt can have ruinous consequences for your credit, which can affect your ability to borrow, secure housing, or obtain a new job. Second, National Collegiate sues borrowers it thinks are in default. Why risk ruining your credit and possibly losing a lawsuit? Third, there’s a real chance you can lose if you pursue this route. A courtroom loss could stick you with National Collegiate’s legal fees, on top of the debt you’d be ordered to repay and any lawyer’s fees of your own.

It’s a gamble that can slash a student debt—or leave a litigant even deeper in the hole.

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