Dealing With Debt

Authored By
Education for Justice

Most families face debt at some time or another. Losing a job, losing public assistance benefits, sudden medical bills, or divorce can push a family into debt. There are many ways creditors can try to collect debts. Two of the most common ways are when they use a collection agency, and when they file a lawsuit.  These methods are discussed in this booklet.

Debt collectors often use pressure tactics that can make a stressful situation worse – and sometimes violate the law. This booklet was written to help families struggling with debt by explaining consumer rights and providing resources. This booklet is a brief guide and is not meant to answer all legal or financial questions.

If you are facing foreclosure, eviction, or repossession of property you should seek legal advice and financial counseling.

Section 2 - Credit Cards

Things to Consider

Using a credit card is borrowing money at a very high interest rate. Ignore temporary “teaser” rates, especially if you can’t pay off your credit card charges in full each month.  A “teaser” rate is a very low interest rate offered for a short period of time (but no shorter than 6 months) that automatically goes up.  If you build up a balance when the interest rate is low, you will be paying it back at the much higher permanent rate.

Besides the interest rate, check to see if the card offers a “grace period.”  A “grace period” means no interest charges if you pay your account in full before the due date. Some cards charge you interest from the date you use your card to make a purchase. Also, find out if the company charges an annual fee for the card.

Annual fees can run from $25 to $100 or more. Make sure you also look at other charges like:

  • transaction fees—these are often charged when you use the card to get a cash advance
  • late charges
  • over-the-limit charges

Read the terms carefully because some cards raise your interest rate if you make a late payment.

Should You Cancel Your Credit Card?

If you have a credit card with a high interest rate, transaction fees, an annual fee or no grace period, you should think about cancelling the card!  You can cancel a credit card at any time, but you still have to pay any money you owe on the account.

Keeping Credit Card Debt Low

  • Try to pay off the total balance each month.
  • If you can’t pay it off, try to pay more than the minimum payment if you can. Sometimes the minimum payment does not even cover the amount of interest you are being charged each month. If you only pay the minimum, you will never pay off the debt and you will end up paying interest on the unpaid interest charges. Pay one card off at a time. Pay as much as you can. The more you pay, the sooner you will pay off the card.  Then go on to another.
  • Carefully check your statement each month to look for mistakes and charges that are not yours. If your credit card is lost or stolen, the most you have to pay is $50, under the Truth in Lending Act.
  • Check to make sure your credit card company has not added a service you don’t want (like loss protection or credit insurance).  
  • Make your payments on time.  If your payment is late you will be charged a late fee.  Many cards raise the interest rate if the payment is not on time.
  • Avoid special services and programs offered by the credit card companies. These are things like credit card fraud or loss protection and life insurance.  Most of these services are a bad deal.  They are usually expensive and are not necessary.


Getting Credit Reports

Once every 12 months you can get a copy of your credit report for free from each credit reporting bureau (Transunion, Experian and Equifax.)  There are some situations when you can get a free copy more than once a year.  See the section later in this booklet that gives more information about credit reports.

Section 3 - Your Debt Collection Rights under the Fair Debt Collection Practices Act

Fair Debt Collection Practices Act (FDCPA)

There is no law that protects you from having to pay debts you owe, but the Fair Debt Collection Practices Act (FDCPA) is a federal law that can protect you from abusive debt collection practices. Minnesota has a state law that includes all of the protections of the FDCPA and other protections too. All debt collectors doing business in Minnesota must follow it. A debt collector is any person or company that collects debts owed to other companies as a part of their regular business. They are usually referred to as debt collection agencies or debt buyers.

If you owe money to a business they may try to collect it themselves or they may hire a collection agency. Debt collection agencies can’t harass or abuse you. If a lawyer regularly collects debts the law treats the lawyer like a collection agency too.

Creditors who are directly collecting their own debts, such as department stores or credit card companies, are not covered under the FDCPA.

Written Notice

Within 5 days of its first call or letter to you, the collection agency must send you a written notice.  The notice must include

  • the amount of your debt
  • the name of the company that you owe and
  • the fact that they will assume the information is right unless you disagree within 30 days.

Disputing a Debt

If you disagree with the notice about your debt, send a letter to the collection agency within 30 days.  If you send this letter, the collection agency must stop trying to collect it until they send you proof of the debt.

Payment Plans

If you do owe the debt, you may be able to set up a payment plan to take care of it. Many creditors will be satisfied with a small payment, as long as it arrives regularly. Ask the creditor for a payment plan. Some creditors will freeze or reduce the interest charges if you start making payments.  If you make any kind of deal, try to get it in writing.  If nothing else, write it down in a letter to the agency or creditor.  Always keep a copy.

Paying on Multiple Debts

If a collection agency is collecting on more than one debt, you can choose which debt your payment will go toward. You can’t choose to have your payment applied to a debt you are disputing.

Post-Dated Checks

Never give anyone a post-dated (a future date) check. A collection agency is allowed to ask for one, as long as they don't cash it before the due date, but it is not a good idea to give them one.  If it does get cashed, you end up bouncing a check.

Stopping the Calls and Letters

You can stop the collection agency from calling you or writing you by sending them a letter called a Cease & Desist letter. Your letter should ask them to stop calling and writing you or it can tell them that you are refusing to pay the bill.

See the sample Cease and Desist letter (PDF) in the documents section of this resource. This letter is only an example. Every situation is different and you need to write your letter about your situation. Maybe you don’t owe what they claim, maybe you owe but can’t pay. The most important thing is that your letter is in your own words and says “Stop contacting me.”

Date your letter, sign it and keep a copy. Send it to the collection agency.

If possible, send the letter by certified mail with a return receipt requested, so you will know the debt collector got it.

You can also create a Stop Contact letter online. This is a step-by-step form-helper that lets you print out a finished letter at the end. You can find it at

After getting your letter, the collection agency can only call or write you to tell you what legal action they plan to take. Remember, this doesn’t give you the right to ignore court papers. For example, if you get a letter called an Order for Disclosure saying you have to tell them what money and assets you have, you must respond. If you don’t, you could face fines or jail time for contempt of court.

What is abuse and harassment?

In general, a collection agency can’t contact other people and tell them about your debt. They can’t tell your employer, co-workers, neighbors, parents, relatives, or friends about your debt. If they need your home address, work address or phone number they can call people to ask for it. But they can’t say that you owe money. They can’t say that they work for a collection agency unless they are asked.

It is illegal for collection agencies to

  • use obscene or abusive language
  • call before 8:00 a.m. or after 9:00 p.m.
  • call you at work if they know your employer does not allow personal calls or creditor calls
  • accept cash without giving you a receipt
  • threaten you with criminal prosecution
  • contact you directly if they know you have a lawyer
  • make a letter look like it is from the government, the court or a lawyer
  • fail to give you the full name of their agency
  • threaten to take any legal action that they do not really plan to take
  • give you legal advice, like "You have no legal defense to this debt."

Enforcing Your Rights

If you think a collection agency is breaking the law, keep careful records of your contacts. When they call, write down the following

  • the date
  • the time
  • the name of the caller
  • and what was said

You might be able to take the collection agency to court. Usually you need to start the lawsuit within 1 year. Call a lawyer or your local legal aid office at 1 (877) 696-6529. 

To make complaints about collection agencies, write to

Minnesota Attorney General Consumer Assistance
1400 Bremer Tower
445 Minnesota Street
St. Paul, MN 55101
(651) 296-3353 or 1-800-657-3787

Enforcement Division MN Department of Commerce
85 Seventh Place East, Suite 280
St. Paul, MN 55101
651-539-1600 or 1-800-657-3602

The Federal Trade Commission
600 Pennsylvania Avenue, NW
Washington, DC 20580
1-877-FTC-HELP (382-4357)

Describe in detail the actions you believe violated your rights. See the sample Cease and Desist letter (PDF) in the documents section of this resource.

Section 4 - The Threat of a Lawsuit

When a creditor starts a lawsuit

Threats of being sued, and actually being sued, are 2 different things. When a creditor starts a lawsuit against you, it does not mean they will win in court and be awarded a money judgment.

Even if the creditor wins the lawsuit, there is no guarantee they will be able to collect the amount of the court’s judgment from you. It is expensive to go to court. If the debt isn’t large enough, some creditors don’t think it is worth going to court.

If the creditor starts a lawsuit and wins, the court awards the creditor a “judgment.” A “judgment” is a court order stating the specific amount you owe to the creditor. The judgment usually includes the amount the judge says you owe, plus allowed court costs and fees. The judgment earns interest at a set rate, so if it is not paid soon the amount goes up every day.

The court’s order doesn’t force you to pay. The order simply says you owe the money. Usually the creditor takes further steps to force you to pay. For example, garnishment of your wages, other income or bank accounts (see the section called "Wage Garnishment and Your Rights"). It can also be seizure (called attachment) of your property. This can force you to pay to get your property back, or to get your property so that it can be sold and the money put toward paying off the judgment.

Your wages or bank account could be garnished even without the creditor getting a judgment against you. If you get a “Summons and Complaint” follow the instructions on it to avoid garnishment.

Protections From Garnishment

If you do not pay a bill, a creditor or collection agency may be able to garnish your wages or bank account or force the sale of your property. Remember, the creditor does not need to get a judgment against you to be able to garnish your wages or bank account.

But the law protects some of your money and property.  For example, a creditor can’t take more than 25% of your “net wages, or $380 a week, whichever is higher.” Net wages means your take-home pay or what you earn after taxes are taken out. Your salary or earnings can’t be garnished if you get any kind of public assistance or for 6 months after you stop getting public assistance. Income from Social Security or the Veteran’s Administration is protected from most creditors.

You can keep your home if the value is $450,000 or less (unless the creditor has a mortgage or lien against the property), a car worth up to $4,800 and furniture and appliances worth up to $10,800. Money held in a health savings account with a present value of up to $25,000 is protected as of May 1, 2018. Contact a lawyer to figure out if your income or property is at risk.

"Exempt” Income and Property

Federal and Minnesota state laws “exempt” a certain amount and certain types of income and property. “Exempt” means that certain things can’t be garnished, seized, or taken in order to pay a judgment debt. This happens when you have little or no income and little or no property.

Certain types of income are also exempt. If you are not sure if you, your income, and your property qualify as exempt, contact your local legal aid office at 1 (877) 696-6529 or a private lawyer.

If your income or property is “exempt,” creditors can’t take your property or income to pay the judgment they won in court. Even though a court order says you should pay the creditor, your income and property are protected from the creditor’s attempt to collect the debt.

How will you know you are being sued?

You will know when you are sued because you will get papers called a “Summons and Complaint.”

Getting the papers is called “Service.” Service means papers are delivered to you in person, by mail and sometimes through a published notice in the local legal newspaper.

•    If they are delivered to you in person they will be delivered by a “private process server” or a sheriff’s deputy.

•    If the papers come in the mail and are about a lawsuit filed in the district court, you will be asked to sign and return a statement saying that you got them. If you don’t sign and return these papers, the court may make you pay the other side’s costs of using the sheriff’s deputy or a “private process server” to serve the papers on you.

•    If you are served by published notice in the newspaper, only the Summons will be published.
Being served by published notice usually means that the person who is suing you doesn’t know where you are. If you actually see the published notice, it is up to you to contact the person or business that is suing you (the plaintiff). Let them know where you are. Once you let them know they must serve you with the actual Summons and Complaint. If you don’t see the notice, the lawsuit can go ahead without you.

How to Respond To a Lawsuit

If you are sued, always respond, especially if you think the creditor’s claim is wrong. If you don’t respond the creditor will almost always win by “default.” You are in “default” if you do not respond to a lawsuit.

How to respond depends on if you are sued in Conciliation Court or in District Court. Conciliation Court is the small claims court here in Minnesota. If you are sued in Conciliation Court, you will usually be served with notice of the lawsuit by mail. The notice papers are called the Summons and Complaint. The papers will tell you the date, time and place for your hearing. They will also give you a short statement about the claim brought against you.

In Conciliation Court you don’t have to respond in writing unless you have a separate claim against the party who is suing you. This is called a counterclaim. But you must go to court on time to tell the judge why you should not be held responsible for the claim filed against you.

If you are sued in District Court, the notice you get will not tell you the date or time for the hearing. The hearing will be scheduled later by the court administrator’s office. Your response to the papers must be made in writing to the lawyer who is representing the other party. Your response must be made within a limited period of time, usually 20 days, or you will be in default for not responding.

Responding In Conciliation Court (Small Claims Court)

Conciliation Court is Minnesota’s small claims court. You can be sued for up to $15,000. If the claim is a consumer credit transaction the amount is $4,000. A “consumer credit transaction” is a purchase or loan taken out for personal, family, or household purposes. You don’t need a lawyer. You also don’t have to file a written answer to the claim brought against you.

If you want to respond to the lawsuit brought against you with a claim or lawsuit of your own against the person who is suing you, then you must bring a "counterclaim." To do that you must go to the court administrator’s office at least 5 days before the date of your hearing to fill out the forms. Ask the court clerk what forms you need.

You might want to try to settle your case before the hearing by making an agreement with the other side. You might agree to pay some amount but not as much as the other party sued you for. You might agree to a plan to make payments on the original amount. Or you might agree to turn property over to the other party in settlement of your claims.

If you want to settle with the other side, call or write to them before the hearing date. In the metro area you may even be able to arrange for a mediator to work with the two of you before the hearing to help settle the dispute. In Minneapolis, Duluth, and St. Cloud, you can call the Conflict Resolution Center at (612) 822-9883.

If you manage to settle your case, put your agreement in writing. Be as clear as possible in describing the agreement you have made. On the day of your hearing take the written agreement with you to court and ask the judge to approve the agreement and make it a part of the court order in your case. This will protect you and the other side in case there is a disagreement later.

You must go to court on the day and at the time scheduled. If the court is behind schedule you should wait. Your case eventually will be called for hearing. If you know that you can’t go or have to leave due to some emergency, call or tell the court administrator’s office as soon as possible. You can ask for another hearing within 20 days after the scheduled hearing, but you have to be able to prove that you had a serious emergency which made you miss your scheduled hearing. A serious emergency is something like being in the hospital. In very rare cases, you can ask for a new hearing within a reasonable time.

Getting Ready for Conciliation Court

Get ready for your court appearance. You have to speak for yourself so plan what you will say before you get there. Make a written outline of everything you need to say.

Talk to any witnesses who might have something to say about your case. Ask them to come to the hearing and tell the judge what they told you. The judge probably won’t accept a written statement from a witness who can’t come to court

If a witness you need won’t come to your hearing when you ask them, talk to the court administrator about how to make them come by sending them a subpoena. A subpoena is a court order saying they have to come to court.

If the plaintiff (the other side) has papers, documents or other things that help your case, and won’t let you see them, ask the court administrator for a subpoena. The subpoena will order them to provide you with the documents.

If specific laws or statutes are involved consider going to your county law library (usually in the county courthouse) or on the Internet to look up those laws so you can point out how they do, or don’t, apply to your case.
It is a good idea to:

  1. Practice the presentation you plan to make in court to the judge. Go and watch a conciliation court hearing well before the time scheduled for your own hearing. You can watch a video about conciliation court online or go to
  2. Organize your documents and bring all of your evidence with you to court. Evidence might include
  • photos
  • letters
  • receipts
  • estimates
  • leases or other contracts which may be a part of the case

At the hearing remember where you are and that the judge has the power to decide the case either way. Be very polite to the judge and to the other party.

If You Lose In Conciliation Court

If you lose, you have 20 days from the date of the court’s judgment to appeal the decision to the District Court.  If you are sure that you want to appeal, call a lawyer as soon as possible to ask for advice on how to appeal.  There is a risk you will lose the appeal and may have to pay even more money to the other side. You may need to hire a lawyer to represent you and this could mean even more for you to pay.  

If you lose and the other party wins, they are the “prevailing party.” As the prevailing party they get a judgment from the court.  The judgment is an order stating you owe a certain amount of money to the other party.  If you don’t or can’t pay the judgment amount, the winner (also known as the judgment creditor or the prevailing party), may take further action to force you to pay the debt.

They may try to garnish your income or bank accounts or try to seize some of your assets.  A portion of your income, some of the property you own and possibly some money you have in your bank accounts may be protected.

See “Exempt Income and Property” in Section 4 and “Don’t Turn Unsecured Debt into Secured Debt” in Section 8.

If you appeal to the District Court and lose, the judgment will stay on your record for 10 years unless you pay it off or have it removed in bankruptcy.  If you do not pay it off, the creditor can renew it for another 10 years again and again until it is paid off or removed in bankruptcy. 

Judgment amounts earn interest at a rate set up by law.  The interest rate will depend on the established rate for the year in which the judgment happened.  A judgment will be on your credit record just like a bankruptcy and may make it hard for you to get credit.

The winner or “prevailing party” can collect the judgment anytime within the 10-year period if they find out that you have new income, accounts, or assets.

Responding in District Court

District Court is more complex than Conciliation Court.  If you get District Court papers, you should see a lawyer as soon as you get them.  If you have a low income, you should contact your local Legal Services office at 1 (877) 696-6529.

The District Court papers you get are called a “Summons and Complaint.”  Respond by writing an “Answer” to the Summons and Complaint within 20 days.  If you don’t, you will normally lose your case by default.  Mail your Answer to the other side’s lawyer.  If they are not using a lawyer, mail it directly to them.  Keep a copy of your Answer for yourself and take it to court.

Your Answer must say why you think you do not owe the money the other side is claiming in the lawsuit. The fact that you don’t have the money or can’t afford to pay the amount claimed is not a “defense” and won’t stop the court from entering a judgment against you.                                                                         

If more than 20 days have passed since the date you got the Summons and Complaint, call a lawyer right away.  It may still be possible to present a defense to the court. 

The court may try to get you to settle the case by making an agreement through a process called “alternative dispute resolution.”  This is also called mediation.  You and the other party may be asked to choose a mediator to help you try to reach an agreement.  An agreement might have things like, paying the other party some of the money or making a payment schedule.  If both of you come to an agreement, put it in writing and give it to the judge for review and approval at your hearing. 

If you are representing yourself, prepare for your hearing.  It is a good idea to learn what you can about the process of presenting your case and about the laws which affect the outcome of your case.  Ask a person you trust to help you practice how to present your case.  Practice what you will say to the judge.

Section 5 - Wage Garnishment and Your Rights

What is garnishment?

Garnishment is when someone collects money you owe by taking it out of your bank account or your paycheck. Sometimes, the creditor will get a court judgment against you, but usually not. The creditor does not need a judgment in order to garnish your bank account or paycheck.

In some cases, your money can’t be garnished.  Money that can’t be garnished is called “exempt.” You will have to fill out papers claiming that your money is exempt.  If your money is not exempt, try to work out a deal with the company or person that has a judgment against you.  They might accept a payment plan, or even payment of less than the full amount.  If you make a deal, be sure it is in writing and signed by both sides.  Keep a copy of it.

A non-profit debt counseling agency like the National Foundation for Credit Counseling can help.  Call 1-800-388-2227 for a local office.  Watch out for companies that charge money to “repair” your credit.  Many of these are rip-offs!

Can your benefits be garnished?

Usually, public assistance benefits can’t be garnished. These benefits are called “government benefits based on need.”  Government benefits based on need includes programs like

  • MFIP
  • Emergency Assistance
  • Medical Assistance
  • General Assistance 
  • MSA
  • SSI
  • Energy Assistance 

Note:  This list does not include all programs that are government benefits based on need.  At least 2 courts in Minnesota have ruled that EITC (Earned Income Tax Credit) money is exempt from most garnishments.

Other programs like Social Security RSDI and Veterans Benefits are also exempt from garnishment.  If you are not sure if the benefits you get are exempt talk to a lawyer or call your local Legal Services office at 1 (877) 696-6529.

BUT, there are times that this money is NOT safe.  Get advice from a lawyer if someone has threatened to take your benefits. 

For example:

  • Up to 15% of your social security retirement, disability or survivor benefits can be garnished to pay for government-related debts like child support, student loans and income taxes as long as you get a minimum of $750 each month.  You must get a warning from the U.S. Treasurer before this happens.
  • Also, your benefits can be reduced or stopped if your county decides that you got benefits that you should not have.

Can they take money from your bank account?

Yes, unless the money is “exempt.”  If your bank account is garnished, you won’t be able to use your money in your account. It will be “frozen” while you claim your exemptions.  You do not get a notice before this happens.  The bank sends you a notice after the money is held.  The notice tells you your rights about exemption.  It will take time before your bank will release your funds. 

If you have written checks or have automatic payments—they may bounce!!  Talk to the people you wrote checks to and tell them about the problem.  If you have set up automatic payments, these will bounce also.  Cancel your automatic payments!  Talk to the bank manager about what is happening.  They might agree to cancel overdraft charges.

Money in your bank account from certain sources is protected (exempt) from garnishment. Some of those sources are

  • government benefits based on need and most other public benefits   
  • unemployment benefits
  • workers' compensation
  • (most) pensions
  • life insurance proceeds
  • veterans' benefits
  • the earnings of your minor child
  • any child support paid to you
  • disability insurance benefits

Loans, gifts, and other peoples’ money are not protected from garnishment when they are put in your bank account. BUT, if you have a joint account, the other person’s money may be protected.  Talk to a lawyer right away.

Sometimes money that is usually exempt is not protected if you owe debts like

  • child support
  • alimony or spousal maintenance
  • student loans or
  • taxes 

Exempt wages only stay exempt for 20 or 60 days after you deposit them in the bank.  See the section called “Can they take money out of your paycheck?” in Section 5. 

If a bank or financial institution is trying to take money you owe out of another account you have with them call a lawyer right away.

How to Claim a Bank Account Exemption

You will not get any warning before your account is frozen. The bank must send you a written notice and exemption forms after the money in your account has been frozen.  If your money is exempt (see above) fill out BOTH exemption notices. Be sure to include copies of your bank statements for the last 60 days. Give one copy to the person or company who is garnishing you and one copy to your bank.

If the company does not object to your claim in 6 days, the bank should put the money back into your account.  If the bank does not get your exemption notice within 14 days, it will continue to hold your money, and you will not be able to use it.

Can they take money out of your paycheck?

They can’t take money from your paycheck if

  1. You are getting or got “government benefits based on need” in the last 6 months (see “Can your benefits be garnished?")

Note:  Courts in Minnesota have ruled that EITC (Earned Income Tax Credit) money is exempt from most garnishments.  One court has ruled that MinnesotaCare is a “government benefit based on need.”                      

  1. You were an inmate in a correctional institution in the last 6 months.

These 2 exemptions protect your paycheck for 60 days after you deposit it in your bank.

If you don’t have exemptions, how much can they take?

Most of your paycheck is protected - even if you are not exempt. Usually, the amount protected is either $380 or 75% of your take-home wages as long as you still get a minimum of $290 per week, whichever is higher.

Only 20 Days: This “25% limit” also applies to paychecks deposited into your bank account – but only for 20 days.   Example: if you deposit a $1,000 paycheck into your bank, $250 can be garnished right away and the other $750 could be garnished after 20 days.

BUT if the garnishment is for child support, then up to 65% of your wages can be withheld.

NOTE: If you are an independent contractor or if you own your business, then these wage exemptions may not apply.  You should talk to a lawyer to see if this applies to you.

How to Claim a Paycheck Exemption

You should get written notice at least 10 days before your paycheck gets garnished for the first time.  Find out if your money is exempt (see above). If your wages are exempt, fill out the exemption notice that comes with the letter.  Hand-deliver one copy to the person or company who is garnishing you and one copy to your employer.  Do this as soon as possible. If you do not do it within 10 days, you can still claim the exemption, but it will take longer to stop the garnishment and get your money back. 

What happens after you claim an exemption for your paycheck or bank account?

You can call the creditor and ask when they will tell your employer or bank to give your money back. The creditor might ask you for more information or proof, like benefits statements. You might get your money returned sooner if you send them the proof that they ask for. You might need to talk to a lawyer to help you prove your exemption claim.  

What if the creditor objects?

If the creditor objects to your exemption claim, they have 6 days to ask for a court hearing to see if your money is exempt. You can go to the hearing without a lawyer.  Remember to bring any documents that will help prove your exemption.  

IMPORTANT: If you do not claim your exemptions or ask for a hearing on time, you can still do it later. You never lose your right to stop a garnishment or to get your exempt money back.  Never rely on legal advice from a creditor or debt collector.

Section 6 - Student Loans

Keep Your Student Loan Out of Default

A college education can be one of the best investments you ever make.  It can help you find jobs that make more money.

Many people have to borrow money to pay for school.  Student loans are different from other kinds of debt.  They can be easier to manage because a number of different payment options are available. But they can also be harder to manage because lenders, including Guarantee agencies and the US Department of Education, can be hard to communicate with.  If you fall behind on student loan payments, the loan goes into “default.” That means the lender may be able to take your money even if you are otherwise “collection-proof.”

Remember that you have to repay any loans you take out.  Try to finance your education with grants, scholarships, work study, and other types of financial aid as much as possible.  Minimize your living expenses while you are in school. If possible, finance your education with Direct Student Loans (made directly by the US Department of Education), because they often offer the best terms.

You have a number of options available to keep your student loan in good standing.  If you are not able to make your monthly loan payment, contact your lender.

Income based repayment plans

You can ask your lender to lower the amount of your monthly payments.  If you took your loan out after July of 1993, the lender may be required to offer you a repayment plan that is based on your income.

There are 4 types of income based repayment plans:

1. Income Based Repayment (IBR)
If you have a federal loan and are not in default you can probably get an IBR repayment plan.  This includes anyone with Federal Family Education Loans (FFELs).  

To qualify for IBR, you have to show that you have enough debt relative to income. IBR uses a sliding scale to figure out how much you can afford to pay each month.

You have to verify your income every year.  Your payment may be adjusted if you have changes in income and family size. 

2. Income Contingent Repayment (ICR)
You can only use ICR if you have a Direct Loan or Direct Loan Consolidation.  The payment can’t be more than 20% of your earnings above the poverty level.  If your income is below the poverty level, your monthly payment could be zero.  If you keep making your payments for 25 years, any debt that is left will be canceled.

3. Income Sensitive Repayment (ISRP)
ISRP is the Federal Family Education Loan (FFEL) that requires minimum payments that equal the amount of accrued interest.  With these plans, your monthly loan payment is figured out based on your expected monthly gross income. Adjustments are made every year.

4. Pay as You Earn (PAYE)
To qualify for PAYE, you must have a partial financial hardship. You have a partial financial hardship if the monthly amount you are required to pay on your loan is higher than the monthly amount you would pay under PAYE.

For more information on these plans and eligibility rules, go to: Another good site is:

Public Service Loan Forgiveness Program

If you work full-time in certain public service jobs, you may be able to get part of your student loan forgiven. 

With a standard loan you should be paid off after about 10 years.  But if you are on a program that lowers your payment amount, it would take longer than 10 years to pay.  In this program, if you make 120 payments (about 10 years) you may be able to stop paying after that.  The balance after 120 payments is the part that can be forgiven and you won’t have to pay.  You can’t be in default or you won’t be able to do this program.

For program details and more information, go to:


If you can’t make a payment at all, ask for a “deferral.” A deferral means you will not have to make any payments and no interest will be added on the loan for the length of the deferral. A deferral can last up to 3 years. You may be able to get a deferral if you:

  • lose your job,
  • have health problems,
  • take time off work to care for your preschool children,
  • are on active military duty, or
  • have some other form of hardship, such as low earnings. 

You can only get a deferral if your loan is not in default when you ask for it and you have not already used up your 3 years of deferral time.


If you are temporarily disabled or having financial hardship you can ask for a “forbearance.”  A forbearance means the lender agrees to let you stop making payments for a while or make lower payments.  The lender may give you a forbearance even though you have already used up your 3 years of deferral.  But interest will be added to the principal of your loan during the length of the forbearance.

The difference between a deferral and a forbearance is that interest continues to grow with a forbearance.

When Your Loan is in Default

The lender may declare the loan in default if you fail to make the required payments for at least 9 months.

There are serious consequences of default.

They include

  1. You lose your right to a deferral.
  2. The lender can sue you, get a judgment against you, and seize any of your income or property that is not exempt under state law.
  3. Even without bringing a lawsuit against you, the U.S. Department of Education can take your federal income tax refunds including the Earned Income Tax Credit-EITC.
  4. Without suing you or getting a judgment against you, the U.S. Department of Education or State Guarantee agency may garnish your wages if you earn more than 30 times the federal minimum wage.
  5. If you get more than $750 per month of Social Security or Veterans Administration benefits, the U.S. Department of Education can take 15% of your check, or the amount by which your check is more than $750, whichever is less.  If you get Supplemental Security Income (SSI), or your Social Security benefits are not more than $750 per month, the Department of Education can’t take any part of your benefits.
  6. If you want to go back to school, you can’t get any new financial aid, either loans or grants.

Getting Your Student Loan Out of Default

There are a number of ways to get your loan out of default.  You can stop the Department of Education from taking money from your wages or Social Security benefits and from taking your tax refunds.

  • You can “rehabilitate” your loan.  To do this, you and your lender decide on a monthly payment amount that is reasonable and that you can handle.  You need to consider things like income and expenses.  You have to make 9 monthly payments in a row to get out of default.
  • If you have more than one loan, think about a consolidation loan.  These are offered by the U.S. Department of Education.  The new loan pays off your old loans.  If your lender has not gotten a judgment or an order of wage garnishment against you, you could qualify for a consolidation loan.  Some reasons for taking out a consolidation loan are:

    -- You would no longer be in default, so you would qualify for deferral, even if you had already had a deferral on your old loan.

    -- A Direct Consolidation loan can be repaid under an “income contingent” repayment plan.  In other words, the lender would have to accept as a monthly payment an amount that is affordable to you based on your actual income. To ask about a Direct Consolidation loan, call the Student Loan Support Center at 1-800-557-7394.
  • If your main concern is that you want to be able to get more loans and grants to go back to school, you might be able to make an agreement with the lender to lower your payments to something you can afford.  If you make 6 payments in a row you are eligible for new educational loans and grants. Note: But your loan is still in default for other purposes, like collection.  The lender could still take collection actions, like taking your tax refunds and garnishing your wages.
  • Even if you took your loan out before July of 1993, you may be able to reinstate it.  This means get it out of default, renew your eligibility for deferrals, stop collection action.  You may be able to do this if you make 12 payments in a row of an amount you agree to with your lender. 

You can ask for a forbearance even if you are in default.  A lender may, and sometimes must, give you a forbearance.  A forbearance does not take your loan out of default, or renew your eligibility for new student loans or grants, but it will stop collection action.

What if a collection company calls?

If debt collectors are collecting on student loans, they can’t harass you and they have to follow the Fair Debt Collection laws. See section 3 – Your Debt Collection Rights.

Making Your Student Loan Go Away

1.  Bankruptcy
The general rule is that student loans can’t be discharged in bankruptcy. Discharge means you do not have to pay the loan back. However, if a judge decides the student loan will cause you “undue hardship” if it is not discharged, he/she can order the loan discharged.   If the loan is discharged, then you no longer have to pay it.  The lender can’t take any further collection action, and you would be eligible for new student loans and grants.

“Undue hardship” is a hard thing to prove.  You have to show that you have no income or resources to make any significant payments on your student loans, and that you won’t be much better off in the future.  It is easier to do this if you are disabled.

2.  Forgiving the Loan 
Sometimes the lender must give up trying to collect on your loan. This is called “forgiving” the loan.  The lender has to forgive your loan under certain circumstances:

  • Closed school
    You got a loan after January 1, 1986, but could not complete your education program because the school closed.
  • Inability to benefit
    Your school let you enroll in a program that they knew you could not benefit from.  For example, if you did not have a high school diploma at the time you enrolled, and the degree/license or certificate you were working towards required a high school degree.
  • Your school forged your signature on the loan application.
  • You are totally and permanently disabled.

The Department of Education has forms to use if you want to apply to forgive your loan.  Download them from the website at

Give as much information and documentation as you can to support your claim.  Return the completed form, together with supporting documents, to your lender or their collection agent.

Need more information or having problems with your lender?

If you have questions about student loans, repayment plans or need more information, go to the Department of Education website at:

Or call the Federal Student Aid Information Center (FSAIC) at: 1-800-4-FED-AID (1-800-433-3243), (TTY) 1-800-730-8913. Or visit the website at

If you don’t know who your student loan lender is, you can ask the National Student Loan Data System at or by calling 1-800-433-3243.

Problems with your lender or servicer?

Most student loans are “serviced” by a company other than the lender. These companies collect payments, answer borrower questions, and do other administrative tasks associated with maintaining a loan. 

Student loan servicers in Minnesota must be licensed by the Department of Commerce.   If you have a complaint against your servicer, you should contact the department at or by phone at 651-539-1600 or 800-657-3602.  You can file a complaint electronically at The department can make the servicer give you money back (called “restitution”) for wrongdoing. 

Minnesota also has passed a “Student Loan Borrower Bill of Rights.”  It is against the law to mislead you or deceive you.  Also, among other things, servicers must check your eligibility for an income-based repayment program.   

You may also call the federal Student Loan Ombudsman at 1 (877) 557-2575 or look for the “Ombudsman” online help form at

Section 7 – If You Were Forced to Take On Debt by an Abusive Partner

Coerced Debt Law

Minnesota passed a law called the “Coerced Debt Law” that could help a survivor of domestic violence if an abusive partner stole the survivor’s identity to take out credit or otherwise used force, threats, or intimidation to make the survivor take out unwanted credit.

The law makes it illegal to force a survivor of domestic violence to take out debt they didn’t voluntarily ask for.  If a survivor has this kind of debt, they can get a court to wipe out that debt.  If the survivor provides evidence that the debt was “coerced,” the court can rule that:

  • The survivor does not owe the debt
  • Any court order (“a judgment”) saying the survivor owes the debt is thrown out
  • Any existing court case the creditor has taken against the survivor for the debt is dismissed.

Before going to court, a survivor of violence must first notify the creditor that the debt was “coerced” and include one or more of these documents: 

  • a police report
  • an Identity Theft Report to the Federal Trade Commission
  • a divorce decree that shows the debt was coerced or a sworn certification from one of a variety of professional counselors or health professionals saying the debt was coerced.

After receiving the notice, the creditor must tell the survivor if the creditor will stop or not stop trying to collect the debt.

Section 8 - Refinancing

If you have any doubts, don’t refinance

Refinancing your debt when you can’t afford your current monthly payments may seem like a good idea, but might not be in your best interests.  Here are some things to think about when refinancing seems like a way out of your debt situation.

  • If you have any doubts, don’t refinance.  Refinancing almost always costs money. It may be up-front costs or it may be over the term of the new repayment schedule.  Ask yourself if the payments you make now or the new refinanced payments will be better for you.  Add up the costs. What will the new grand total be that you will pay over the lifetime of the loan? 
  • For how much longer will you have to make payments? 
  • How much is your new interest rate and what does it mean in terms of the total interest you will pay over the lifetime of your loan?

Don’t Turn Unsecured Debt into Secured Debt

“Secured loan” means that the creditor can take a promised piece of property (called “collateral”) if you don’t pay.  The creditor does not need to sue you first – they can usually take the collateral as soon as you are late. These are usually home mortgages and car loans.

“Unsecured loan” means that there is no collateral. If you don’t pay, then the creditor has to sue you in court to collect.

It is usually a bad idea to borrow money from a secured loan to pay for an unsecured loan. The reason this is bad is because your exemptions may protect all of your property from unsecured creditors like credit card companies.  But these exemptions do not stop secured creditors. 

For example: you borrow money from your house (called Home Equity Loans) to pay your credit card bill.  Even though the house was safe from the credit card company, you could lose your house if you don’t pay on the Equity Loan.

Ask Questions before You Sign Any Document

  • What will your new interest rate be? 
  • What property that you own are you putting up as collateral for the loan?
  • How long and for how many years and/or months will you be paying on the new refinanced debt obligation? 
  • What will the total of all your monthly payments be when you get done paying the debt?
  • Are there special rules (terms) about your payments during the time you have the loan?
  • Will the amount change?
  • What are the up-front closing costs?
  • Are there any continuing closing costs?
  • When can your new lender demand you pay the total amount owed before the end of the contract?

Beware of Refinancing Scams

Do you know the bank, loan business, or finance agency you are dealing with?  Were you introduced to them when someone came to your door?  It is much better to use a local, established company than a “fly-by-night” agency.  There are many people out there looking to scam you.  They will take your money today and be gone tomorrow by selling your payment obligation to another financing company that may not be available to work with you.  You could lose your home.  

Beware of Lenders That Aggressively Advertise

  • Be careful of a lender that offers to lend you more money than the collateral is worth.
  • Be careful if they promote the tax deductibility of your loan.  If they do, make sure they explain when and why your loan may not be tax deductible in language you can understand.  

Beware of Loan Modification Scams

  • If you are in foreclosure and would like to adjust your loan or lower or extend you payments, the Minnesota Homeownership Center operates a statewide foreclosure prevention program.   For help, call the Homeownership Center at 651-659-9336 or visit their website at
  • Be very careful of offers to help you get a loan modification from a person or business that charges you a fee.  If you choose to use a person or business to help you get a loan modification, you do not have to pay any fees until they provide the service they promise.

Don’t Refinance with the Company That Holds Your Original Debt

They may require you to pay new loan closing costs and other fees as a condition of getting the loan. They may charge you prepayment penalties when they pay off your old loan. They may insist you pay a higher interest rate on your new loan. They may also insist you add more property to the deal to secure your new debt obligation.

Get Advice Before You Sign

Make sure you get independent legal or financial advice from a professional before you sign.  You need to choose the person to help you.  Don’t just use someone the lender suggests.  Ask the person to look at the paperwork and give you advice before you sign.

If the loan is a home equity loan or credit line then you have 3 days to cancel the loan after you sign.  You can cancel for any reason by letting the lender know in writing. Remember with this kind of loan you are putting your home up as collateral.

Section 9 - Bankruptcy

What is bankruptcy?

Bankruptcy is a legal proceeding in federal court. A person with a lot of debts can get rid of those debts (“discharge” them) or get a new re-payment plan (“re-structure the debt”) if it is approved by the court.  The two primary types of consumer bankruptcies are called Chapter 7 and Chapter 13.

Chapter 7

Chapter 7 bankruptcies are also known as liquidation bankruptcies. You can get rid of your responsibility for all or most of your debts by giving up your non-exempt property to be sold.  This does not usually include your home, car or furniture.  The money is then used to pay off your creditors. 

In this type of bankruptcy the creditor only gets back pennies on the dollar of the original amount they were owed.  If the bankruptcy is approved, you are no longer legally obligated to repay the debts.  You only have to pay if you “re-affirm” your obligation to pay specific debts after the bankruptcy is granted. Reaffirming a debt means you agree to pay that specific debt.

Chapter 13

Chapter 13 bankruptcies let you re-organize your debts and assets. A “Chapter 13 plan” is created so you can pay off your debts over a span of 3 to 5 years.  The bankruptcy court has to approve the plan.  The creditors don’t usually get all of the money you owe them but they get some of it. The idea is that it is better to get some money back than to get none. In this type of bankruptcy you can sometimes keep some non-exempt property.  But property that was listed as a “security interest” or collateral is different. You may have to work out a new agreement or contract with the company listing the property as a security interest. You can’t always keep all your property in this type of bankruptcy.

Good Things about Bankruptcy

  • Gives you a fresh start on managing your finances and meeting your financial obligations.
  • Lets you keep your home or car so that you can keep using them.  Filing for bankruptcy can prevent foreclosures, cancellations of contracts for deed and repossession of vehicles.
  • Puts a stop to collection activity for a time. Filing for bankruptcy protection stops:
  1. Collection activity including garnishments and attachments that are already started
  2. Lawsuits for foreclosure, eviction, cancellations for contracts for deed
  3. Lawsuits to enforce collection of other obligations
  4. Utility terminations           
  5. Collection of judgments against you.

Stopping these activities is only temporary, but after some time you may be able to work out a new payment plan or make other arrangements to put an end to collection action.

Bad Things about Bankruptcy

  • Bankruptcy can mean that you have to give up property that is not exempt or which is not protected for some other reason.   Like being subject to a mortgage, contract for deed or security interest (like your house or car).
  • Bankruptcy can also mean you will have a hard time getting credit in the future for important and necessary goods and services.  A bankruptcy stays on your credit history for 10 years and may cause many lenders from approving credit. 

    Some local creditors may not care about your credit report, or because of your local standing in the community, may still be willing to give you credit.
  • Bankruptcy may have a bad impact on your reputation if it becomes known publicly.  This may be a reason for you to “re-affirm” debts owed to lenders in your community.  

Discrimination Because of Bankruptcy

Filing for bankruptcy protection may lead some businesses to discriminate and refuse to provide credit to you. They may also refuse to hire you. You do have some protections like

  • An employer can’t fire you for filing bankruptcy.
  • A utility company can’t deny or refuse services because you have filed for bankruptcy.
  • Medical providers can’t refuse to give you emergency medical services because you filed for bankruptcy. But medical providers CAN refuse routine services to you if you have a bankruptcy in the past, unless you have proof of present ability to pay.

If you can show that the denial of services or employment or housing is because of your bankruptcy filing, you could have a basis to sue in court and get the denial overturned.

Filing for Bankruptcy

To file for bankruptcy you almost always need the help of a lawyer.  Many lawyers charge a set fee plus court filing costs for specific types of bankruptcy help. Some lawyers are willing to set up payment schedules for their fees.  Others want the full amount up front. 

If you have questions about bankruptcy meet with a lawyer who practices bankruptcy law in order to discuss your rights, options and the required procedure.

If you would like legal advice about your debts or a possible bankruptcy, call a lawyer or your local Legal Services office at 1 (877) 696-6529.

If you would like help with budgeting or with paying your debts, you should call Family Means’ Consumer Credit Counseling Service (CCCS) at 651-789-4014 or 1-800-780-2890.  CCCS may be able to help you set up a repayment plan to take care of all your debts.

Section 10 - Debt Management, Debt Settlement, and Avoiding Scams

How to Avoid Scams

You may owe on credit cards, for medical bills, or for back taxes to the IRS.  Being in debt can be very stressful.  That stress can make it easy for people to fall for scams.  There are many dishonest “businesses” that make you think they want to help you.  In fact the “business” is just a scam to get your money.

Do not to fall into a trap that makes your debt problems worse.  Here are some things to look out for and avoid:

  • DO NOT sign up with any business that says it will help you
    --get out of debt
    --fix your credit
    --get creditors to leave you alone

    Get advice from a legitimate nonprofit credit counseling agency.  Again, make sure the agency is accredited and their counselors are certified.
  • Be careful of companies offering “debt management” services or plans.  These are plans where the company acts as a go-between with your creditors.   The company says they will set up a repayment plan with each of your creditors.  Then they take a lump sum payment from you each month and make the monthly payment to each of the creditors.  But, the lump sum you pay will include fees for the debt management company. You should make sure the lump sum you pay includes the full amount owed to your creditors in addition to the fees. Ask the debt management company to tell you exactly where all the money you pay goes.

    Debt management service companies MUST have a license from the Minnesota Department of Commerce. They MUST follow strict Minnesota laws. For example, BEFORE you sign a contract with them they have to tell you which of your creditors has said they will be part of the plan and which refuse to  participate. They can’t charge more than a one-time $50 “origination” fee and then no more than $75 per month “maintenance” fee. 
  • Be very careful about companies offering “debt settlement” services.   These companies say they will lower your debts by getting creditors to “forgive” a large part of what you owe – whether it is on credit card debt, medical debt, or tax debt. Do not sign anything until you check to see if the service has a current license from the MN Department of Commerce.

    IMPORTANT NOTE:  Debt settlement companies CANNOT take any money up-front and can ask you to pay fees only after they have provided the services they promised.

    Debt settlement companies MUST have a license from the Department of Commerce.  They MUST follow very strong Minnesota laws that protect consumers. For example, before you sign a contract, they have to make sure the plan is right for your situation.  They have to tell you they don’t guarantee success, and that you can still be contacted and sued by creditors.  They also have to tell you that interest and fees will keep adding up during the time you are in the debt settlement plan. 

Note: The main purpose of “debt management” is to help you fully repay all that you owe.  The main purpose of “debt settlement” is to help you get part of your debt “forgiven” so the total you have to pay is less than what you owe.

Before signing up with a debt management or debt settlement company, make sure they are licensed.  You can check with the Minnesota Department of Commerce to see if the company is licensed by calling 651-539-1600 or 800-657-3602 or going to their website:

Bankruptcy May NOT Be the Solution

Bankruptcy is NOT the only way to deal with your debt. You have options. Bankruptcy may not be necessary or make sense if:

  • you have no income, savings, or other property or assets which can be taken from you to pay off your debts
  • you want to keep property that can be taken to pay off your debts
  • you have only a few debts
  • you have a strong defense why you don’t owe the debt
  • you have a way to make payments on your debt or
  • the only reason you want to file for bankruptcy is because you want to stop being bothered by creditors. There are ways to stop this other than bankruptcy.

Note: If the debts you are worried about are backed (secured) by your home or car or other important property and your income isn’t enough to pay both current and past due debts, bankruptcy will not help you (see Section 9 for more information).

If any of these factors apply to you, there are other things you can do instead of bankruptcy.

Credit Counseling May Help

Legitimate credit counseling agencies can help you figure out the best way to deal with your debt. Legitimate agencies are here to help people, not scam them. The best way to be sure that the agency is legitimate is to use a nonprofit service that is either free or low-cost.

Good credit counselors can help you review your situation, give you options, and advise you on the best ways to get back on your financial feet. They also may offer free or low-cost financial training so you can avoid credit problems in the future.

Make sure that the agency you use is “accredited.” This means that they are given a seal of approval that they meet high standards. Also make sure that the counselors are “Certified Consumer Credit Counselors.” These counselors have to pass tests to make sure they are good counselors.

You can find out if an agency is accredited by checking with the National Foundation for Credit Counseling at