Very few civil actions ever see trial. The statistics bear this out, and suggest that 98% of all cases settle before trial. This is especially true in adversary proceedings to discharge student loans for “undue hardship.”
Trials are expensive, risky, and when the issue on the table is repaying debt that has already been through bankruptcy, lenders understand they are not dealing with very safe or secure debt. They would very much prefer to work out an arrangement that is mutually acceptable to the bank and your client. This is good news for you.
So, what do you do? Some lenders may be willing to work with you right out of the gate. Others are going to insist on some discovery to see about your client’s financial situation before agreeing to settle. Either way, present your client in the best possible light. Show that they are working hard in their jobs or at finding a job and are not extravagant spenders, but are genuinely in financial trouble. Once you’ve satisfied some basic standard of hardship, it’s time to talk settlement.
First, cut the principal down. Ideally, you want to shoot for a settlement of around fifty cents on the dollar. If your client owes $200,000, get it down to $100,000. The best way to do this is first offer to pay twenty-five cents on the dollar, and let them counter, and then you counter their counter. If the interest rates are high, chances are a large chunk of the debt is capitalized interest. Remind the lender of this, and talk about reducing the balance to the original principal.
Second, get the monthly payment under control. If your client has multiple private loans at high interest rates, it’s very likely they are being asked to pay in the thousands of dollars a month to service the debt. This is untenable. Once you’ve reduced the principal, this will take care of some of the problem. But now suggest you extend the debt over 30 years. This will cut the monthly payment in half again.
Third, stop the interest payments going forward. Now, once you’ve extended the debt over 30 years, you need to be careful that your client doesn’t end up in worse position than they were before. Demand no interest going forward, but accept a 1-3% interest rate. That’s a manageable level, and will not result in any harsh interest capitalization provided your client makes payments on time.
Many clients are okay paying back some of what they owe in student loans. The biggest problem in my experience is the terms of the payment and the amount of payments being asked. If you can get your client’s student loan situation under control for them, you will have provided an invaluable service to them for years to come.