Defaulted Student Loan Consolidation

In a defaulted student loan consolidation , the parties have usually stated in their security agreement the conditions that will constitute a default. The typical default is a failure to make timely payments on the loan. Another type of default may be to breach a warranty that no liens or other security interests cover the same collateral as that relied on in the security agreement.

Rights and Duties Before Default

Before default, the parties have certain rights or duties, unless specified differently in the security agreement.

The secured party:

(a) may release or assign all or part of the collateral;

(b) may file an extension or amendment of a financing statement, although the latter also requires the debtor's signature;

(c) if in possession of the collateral, must use reasonable care to preserve it.

The debtor:

(a) may periodically request and receive from the secured party a written statement as to the current amount of the unpaid debt, and perhaps a full listing of the collateral;

(b) bears the risk of loss or damage to the collateral;

(c) must pay for all reasonable expenses incurredin taking care of the collateral.

Rights and Duties After Default

Upon default, the secured party may sue on the underlying obligation or enforce the security interest directly. These remedies are not exclusive, and can be cumulative if need be (UCC 9-601, c). Other remedies for student loan default may include the following:

(1) defaulted student loan settlement with the creditor;

(2) defaulted private student loan consolidation that has been agreed upon by both parties;

(3) an agreement with the United States Department of Education concerning the loans due or sending them a written statement or payment to them directly;

(4) a settlement of a personal defaulted student loan;

(5) a settlement that concerns a defaulted financial aid consolidation or work out arrangement;

(6) a medical student loan consolidation or work out agreement;

(7) researching further student loan consolidation information to assist with a work out arrangement with the creditor.

Defaulted student loan consolidation is included in UCC Section 9-609 that states the secured party's right to take possession after default, unless prohibited by the security agreement itself. Although the secured party may take possession without a court order, a defaulted student loan consolidation agreement would take first position in any type of work out. Also the actions must not lead to a breach of the peace (UCC 9-609,b,2). As is the case before default, the secured party has to exercise reasonable care over any collateral it now possesses.

As an alternative, a secured party may now require the debtor to assemble the collateral at a place designated by the secured party. In fact, the secured party may choose not to remove collateral equipment, but simply to make it unusable and then dispose of it (e.g., sell it) on the debtor's premises.

Priority of Creditors

Obviously, one major purpose of the secured transaction is to ensure that the secured party can use the collateral to collect the debt before other creditors may do so. Thus one creditor has priority over another creditor (who has an interest in the same collateral and/or is owed money by the same debtor).

For Article 9 priority rules to apply, at least one party must be a secured party. UCC 9-21 states the basic premise, "Except as otherwise provided in the Uniform Commercial Code, a security agreement or defaulted student loan consolidation agreement is effective according to its terms between the parties, against purchasers of the collateral, and against creditor." A secured party wins the priority dispute unless a UCC rule (e.g., in Article 9) decides that it loses.

You Should Remember

UCC Article 9 governs secured transactions. A security interest may be taken in almost any type of personal property.

To make the security interest or defaulted student loan consolidation effective between the debtor and the creditor, it must "attach" to the secured property (collateral). Attachment requires (1) a written agreement stating a security interest, describing the collateral, and signed by the debtor; (2) value from the secured party to the debtor: and (3) rights of the debtor in the collateral.

To make the security interest or defaulted student loan consolidation work against third parties, it must be "perfected" by (1) possession, (2) control, (3) attachment, or (4) the filing of a financial statement.