Litigation: Definition and What It Is
Litigation, in the context of loans, refers to legal action a lender or debt holder takes to collect on a defaulted loan. For private student loans, litigation typically involves filing a civil lawsuit against the borrower to obtain a court judgment. Federal loans have collection tools that do not require litigation, including wage garnishment and tax refund seizure, so federal lenders sue less frequently.
If a lender wins a court judgment on a private student loan, they gain additional collection powers under state law, which may include garnishing wages, levying bank accounts, or placing liens on property. The statute of limitations on private student loans varies by state and determines how long a lender has to sue after default.
Why it Matters
A lawsuit on a defaulted private loan is a serious escalation. Once a judgment is entered, the lender's collection options expand substantially. Wage garnishment through a court order, for example, can be more aggressive than the administrative garnishment limits that apply to federal loans. A lien on a home could affect the ability to sell or refinance.
Most private lenders pursue litigation as a last resort after other efforts have failed, or when the balance is large enough to justify the cost. Knowing whether your lender has filed or is likely to file matters significantly for how you prioritize resolution. Yrefy's article on dealing with private loan default covers the full timeline from delinquency to potential litigation, and the wage garnishment guide explains what a judgment-based garnishment looks like versus a federal administrative garnishment.
Example
A borrower defaults on a $22,000 private student loan and stops responding to collection contacts. After 18 months, the debt buyer who holds the loan files a civil suit in the borrower's county. The borrower does not respond to the lawsuit, and a default judgment is entered for $22,000 plus accrued interest, fees, and attorney costs. The judgment holder then files for wage garnishment. The borrower's employer receives a garnishment order and begins withholding a percentage of each paycheck until judgment is satisfied.
