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The Perfect Creditor

By Harold Stotland

When I was asked several months ago to participate in an all-day seminar on collection matters, I had to choose a topic. The topic I chose was the Guaranteed Student Loan. I chose this topic, not only because I have represented many guaranty agencies, but also because we believed it was a topic of serious interest to the attendees, who were mostly attorneys and law clerks.

Suppose I were to suggest to you that I had promissory notes to place with an agency or a law firm in which the creditor's claims had no statute of limitations, no limitation on the enforcement of a judgment, and any judgments were not dischargeable in bankruptcy. Essentially, we would create a "perfect creditor" against whom the only defense was "I'm not the right defendant" or "I paid the bill."

The Guaranteed Student Loan (GSL), which has been with us for generations now, is probably one of the most pervasive Federal programs ever created outside of the Social Security program. I told the attendees "you either have or had a student loan, one of your children has or had a student loan, or you will have a child who will have a student loan." While the use of the student loan program has become more and more pervasive in our daily life, very few of the borrowers really understand the seriousness of the obligation they are undertaking when they borrow.

A GSL is a loan that is guaranteed by the Federal government. These loans include not only loans administered through student loan agencies operated by virtually every state, but also loans administered by various educational institutions. They are also governed by a two-page promissory note, which is similar to many other kinds of commercial or consumer promissory notes.

In addition to the express terms of the note, there are many other statutory or regulatory conditions, which are incorporated into the note by law. For example, unlike almost every other kind of claim, there is no statute of limitations on the time within which the government or educational institution has to bring suit after default. In addition, when and if a judgment is obtained, there is no limitation on when it can be enforced. Most states have a seven-year or ten-year enforcement period after which the judgment must be revived to be enforceable. These judgments do not have to be revived.

The GSL can be sued upon just as any other promissory note, but the guaranty agency that administers the note can also use administrative enforcement, which means that garnishments can be issued without a court order after notice to the debtor. Instead of having a day in court, the borrower gets to have an administrative hearing, which is often conducted by telephone.

Probably the single most important aspect of the GSL is that it is not entitled to bankruptcy discharge except upon a showing of hardship by the bankrupt. The creditor does not even have to request that the loan be excepted from the discharge, it is not discharged if it is a GSL.

The Congress of the United States has expressed its desire and determination that student loans shall be treated with the highest majesty of any form of debt. In fact, Congress's intent to make certain that guaranteed student loans are paid has been expressed over the years by the fact that the most recent change in the bankruptcy code regarding student loans was to remove all possibility of discharge except for hardship. Previously discharge was allowed if bankruptcy was filed more than seven (7) years after the debt became due. Several years ago, Congress removed that exception so that no student loan is subject to discharge no matter how old it is except upon the finding of hardship.

The United States Congress and the Department of Education have respectively passed statutes and regulations to provide for the easy and effective recovery of student loans that go into default. No amount of delay on the part of the debtor or failure to act on the part of this creditor will undermine the right of the creditor to sue, obtain a judgment, or proceed with administrative enforcement of the claim. Congress has carved out from all other debt due to the United States this special category of debt and created the "perfect creditor". As the cost of college and professional education rises, the amount of Federal debt that falls into this category will continue to increase.


Harold Stotland is a principal of the law firm of Teller, Levit & Silvertrust, P.C.

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