Can a Student Loan that Was Discharged in Bankruptcy Still Be Subject to Tax Offset?


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Student loans are a constant worry for many individuals that go to college and cannot afford the tuition and fees associated with the admission. When the degree earned is not capable of providing a constant stream of income, and the person affected cannot obtain gainful employment, he or she may seek the option of bankruptcy.

When this occurs, it is possible for student loans to be discharged. This means that the loans accrued while going to a university or technical school are no longer an obligation to pay back. While it is not easy to ensure they are discharged when going through bankruptcy procedures, it is possible when they impose an undue hardship on the individual.

However, even if they are removed from requiring payment, there are issues that may arise such as tax offsets. Federal payments may be seized when taxes are filed to attempt to have them paid in some manner. This provides the original lending institute a way to regain some of the funds lent out. An offset requires notice to the former student before the tax refund is collected by the agency. Additionally, only the taxes that may be refunded are offset, and all other income is not touched in this manner. When an offset occurs that does not appear valid or legal, it is best to contact a lawyer to determine if there is another procedure to follow to stop the tax offset.

Seized Taxes through Offsets

When a tax refund is seized, it is up to the entire amount that may be used to offset the loan debt. Even though the funds are taken without permission, the individual is warned about the date the offset occurs and the information surrounding the action. It is important to setup a repayment plan with the entity that is owed the monies so that a tax offset may be avoided. The warning notice provides the date the deadline exists to start this arrangement. Garnishments of taxes and wages are usually higher than payments that are setup voluntarily. When the actions of either rehabilitation or consolidation are accomplished, the debt may eventually be resolved. It is important to communicate with the holder of the loan so that the plan may be implemented.

State laws provide for any number of wage or income types to be seized as well as federal tax refunds. State income tax may also be garnished for federal student loans based on state regulations. The student loan database online may provide information about possibilities of other taxes or fees being seized in this manner. Additional wages that may be taken often include benefits owed through various federal payments such as Social Security payouts. It is possible to challenge the offset through an appeal request with the United States Department of Education or similar guaranty agency that may be involved. This must be completed before or after an offset is applied to the income or wages. However, even if the appeal is successful after an offset has initiated, the federal government repays the seized monies.

Challenges and Prevention

When notice about the offset has not been received by the holder of the loan, a challenge is not necessarily valid just because of this reason. However, if it may be proven the loan has been repaid through a dispute, the loan belongs to another person, the debt was already discharged through bankruptcy or other reasons such as disability, it may reverse the offset. Some challenges may be made for financial hardship caused by the offset.

It is important to avoid defaulting on a student loan in order to prevent a tax refund offset. There are usually many options available to former students that owe debt through student loans in the United States. Some protections include permanent disability and bankruptcy. In certain situations, payments may be temporarily be postponed while this is not available for other debt accrued.

The Need for a Bankruptcy Lawyer for Student Loans

It is vital to contact a lawyer that is experienced in bankruptcy procedures to ensure the process may discharge the student loans. If additional paperwork or processes must be completed, he or she will know this information. Additionally, if garnishments may be postponed or the loans repaid at a lower rate, these legal professionals often understand how to start these processes. However, when possible, the discharging of the loans should be completed as soon as possible for those individuals with little income.

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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.

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