Stopping a Tax Offset for a Defaulted Federal Student Loan Chicago Bankruptcy Attorney


     By Glanzer & Associates, PC

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Federal student loans are guaranteed by the US government and administered by the Department of Education. When a borrower defaults on the loan, the Department of Education may refer the loan to the Department of the Treasury for collection. The Treasury issues your tax refund check, which can be offset to pay your defaulted student loans. The Treasury will offset your entire refund, even if it includes money owed to your non-obligated spouse or an earned income tax credit.

So what can you do to stop this nightmare?

First, the Department of Education is required to send you notice of the offset. You are entitled to a hearing and an opportunity to present evidence when challenging the debt. If you make a timely request for a hearing, the collection process must stop. So it is in your best interest to review the loan documentation and request a hearing if there are mistakes. During that time you should also contact the Department of Education, negotiate a repayment schedule, and request that all garnishments and seizures cease.

Second, you should check with the Internal Revenue Service and see whether your tax refund will be offset. The number to the IRS Offset Hotline is 800-304-3107.

Third, if you filed a joint income tax return, your spouse may be eligible to reclaim his or her portion of your joint refund. Your spouse must file an "injured spouse" claim form (IRS Form 8379) with the Internal Revenue Service. Questions regarding the amount your spouse will receive can be answered by the IRS by calling 800-829-1040.

Fourth, you may be able to stop the collection process if you can show evidence of financial hardship. You must contact the Department of Education and submit documentation to support your claim. The Department of Education will consider your claim and may agree to modify the withholding action.

Finally, bankruptcy may stop an offset of your income tax refund. The bankruptcy laws on this matter are complex and require the attention of an experienced bankruptcy attorney. In general, the bankruptcy code allows a creditor to offset money owed to the debtor against a pre-bankruptcy debt. The offset must involve the same parties to the credit and the debt. If the creditor wants to perform an offset during the bankruptcy (for instance, during a Chapter 13 bankruptcy), it must first ask the bankruptcy court for relief from the automatic stay.

If you have defaulted on your student loans, you may be able to stop an IRS offset of your income tax refund. It is important to discuss the specifics of your situation with an experienced bankruptcy attorney. Your attorney can recommend the best course of action to protect your assets and income.

Legal disclaimer: Disclaimer: This answer does not constitute legal advice. I am admitted in the State of Illinois only and make no attempt to opine on matters of law that are not relevant to Illinois. This advice is based on general principles of law that may or may not relate to your specific situation. Facts and laws change and these possible changes will affect the advice provided here. Consult an attorney in your locale before you act on any of this advice. You should not rely on this advice alone and nothing in these communications creates an attorney client relationship.

ABOUT THE AUTHOR: Charles E. Glanzer
Charles Glanzer is a Chicago bankruptcy attorney and one of the founding partners of Glanzer & Associates, P.C. Charlie has been licensed to practice law in Illinois since 1992, and has worked for some of Chicago's largest bankruptcy firms. Charlie focuses his practice on representing clients in Chapter 7 and Chapter 13 bankruptcy cases. Charlie represents his clients with a high level of sensitivity and professionalism, and has discharged millions of dollars of debt for his clients. Charlie's commitment to helping people in financial distress not only involves relieving his clients of their financial burden, but also counseling them about life after bankruptcy and rebuilding their credit.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.