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What’s a fair settlement?

Once you file the complaint, the time is already ripe to begin considering settlement.

Now, when your client attended an unaccredited school, the only settlement is a complete discharge of the debt.  Do not settle for anything less.

However, very often your client will have a mix of private loans.  Some qualified, some non-qualified, and some which perhaps you cannot determine.

Some lenders, especially the larger banks who no longer originate student loans, may be willing to reduce the principal by 50% with minimal interest going forward right off the bat.  Others will take a firmer stance.

It is crucially important to remind the creditor that it is their burden to prove the loans are qualified education loans. This is very difficult to do, and very often they have no paperwork to prove this beyond the self-serving certifications in the promissory notes.  In order to prove this, they will need to subpoena the school, and bring in a compliance officer to testify at trial.  This is all very time consuming and expensive, and provides you leverage.

If you cannot reach a fair settlement during discovery, move for summary judgment on one or more of the loans to get the spectrum of settlement more in your favor.  If you cannot prove any of the loans are non-qualified, move for summary judgment on the interpretation of section 523(a)(8)(A)(ii).  If you can get a ruling on that point, you will really put the pressure on the creditor to prove the loans are qualified, which is expensive and time consuming (and risky).

When it comes to settling a case that primarily concerns “undue hardship,” your task is more difficult.  The creditor is going to look at two things: your client’s paystubs and your client’s bank account statements.  They are going to add up all deposits for the year, and try to make an issue that your client has other sources of money beyond their salary (often small deposits from time to time from Mom and Dad).  They are also going to cherry pick some examples of your client going out to dinner, or buying in iPad, and say this proves your client is a spendthrift.   Don’t let this scare you.  Remind them that Mom and Dad are not obligors on the Notes, and while their charity may have helped your client in the past, the creditor cannot use sources of money outside the debtor’s “household” to compel payment on debts.  Point being, the court is going to analyze the debtor’s ability to repay the loans based on the debtor’s (or any spouse’s) income alone.   Unfortunately, when your client has been less than frugal in their spending habits, there is not much you can do.  So, ignore it.  Judges are people too and may understand that going out to dinner once or twice is not a cardinal sin.  But be careful about clients whose spending does raise some genuine concerns about their supposed “hardship.”  If they really are spending too much on non-essentials, you may want to want to settle sooner rather than later.