Can Chapter 13 Help with Student Loans?

You may be discouraged if you have already read that most student loans are not dischargeable in bankruptcy.  It’s important, however, not to over-generalize in this area.  Bankruptcy may still be able to help with your high student loan debt.  First of all, we can analyze your student loan documents to determine whether your student loan is dischargeable or not; and secondly, even if you can’t discharge the debt, we can often help you design a chapter 13 plan which reduces your student loans substantially or pays them off in full.500px-Graduation_hat1.svg

Historical Treatment of Student Loans

This area of law is complicated by the many changes Congress has made in the recent past. Thus, it’s easy to get confused by outdated information, or stories you may have heard.  Prior to 1976, all student loans could be discharged in bankruptcy.  From 1976 through 1998, student loans could be discharged after a waiting period (at first five years, and later seven years after the repayment period began).  In 1998, Congress made federal student loans nondischargeable (i.e., loans funded directly by a federal government program or agency).  In 2005, it similarly extended nondischargeability to most state government and private student loans (i.e., loans  “made under any program funded . . . by a governmental unit or nonprofit institution” or which are “qualified education loans” for tax purposes).  It’s important to note that there are still some programs out there which do not fit that definition and are, in fact, still dischargeable.

Also, even if you have a qualified education loan, the bankruptcy court can still discharge it in the case of undue hardship, however, the standard for establishing that is quite high and most debtors are unsuccessful unless there are uniquely compelling circumstances such as disability.

Things you should do before considering bankruptcy.

For starters, you should contact your student loan agency to see whether you qualify for one of the many deferment or forebearance options, such as economic hardship, military service, parental leave, further education, etc. If your loan is governed by the U.S. Dept. of Education, you can find appropriate forms and information here:

Secondly, you should contact your student loan agency and see if you qualify for an income-based repayment plan.  Most student loan agencies have such programs, and if you are approved, your monthly payment will be lowered to an affordable level.

Thirdly, you should explore whether you might be entitled to an administrative discharge based on special circumstances, such as the closure of your school, false certification of a school’s status, etc.  These are very obscure, but you should check into every possibility.

Finally, if you have a serious health issue, you should explore whether your student loan may be dischargeable under disability discharge provisions.  Most bankruptcy judges will not consider awarding an undue hardship discharge for health reasons unless you have already applied for the administrative discharge.

How Bankruptcy can help:

If you have exhausted your options listed above, bankruptcy may be your best alternative, especially if you are seriously in default, have a judgment against you, or have a collection agency hounding you.  What can bankruptcy do for you?

1.   Relief from High-Pressure Collection Efforts

The Automatic Stay goes into effect immediately when you file your bankruptcy petition, and stays in effect the whole time your plan is being paid – 3 to 5 years.  All phone calls, letters, demands to pay, wage attachments, etc. are immediately stopped.  You gain control over the situation, and time to formulate a workable plan of repayment.

2.  Relief from Interest Accumulation.

Once a student loan has gone into default and a court judgment issues, the interest rate can jump to a default rate or you state’s judgment rate (in Massachusetts: 12%).  Even making minimum payments, your debt may still climb.

Bankruptcy stops that bleeding.  No interest accumulates during your Chapter 13 plan, allowing you to repay dollar-for-dollar.  Every dollar you pay while in your Chapter 13 plan goes directly toward reducing the principal amount of your debt.

3.  A Real Chance To Pay Off Your Student Loans

If student loans are your only unsecured debt, then you have a good chance at seeing your student loan debt repaid  in full during your Chapter 13 plan.  If the student loans are not your only debt, but the largest share of it, you still have a good chance at seeing your student loan debt paid off in full.  Even if we can’t make that happen, often we can substantially reduce your student loan debt so that after your Chapter 13 plan is over, your remaining student loan debt is affordable and can be repaid in a few years following the completion of your plan.

Even in the worst-case scenario, if you are still left with unmanageable student loan debt after the conclusion of your Chapter 13 plan, you can immediately re-file another Chapter 13 case and get all the benefits again, including affordable repayment and dollar-for-dollar reduction.

In some cases, we can propose a Chapter 13 plan that discharges your your student loan debt even though repayment in full is not made, if the student loan agency agrees.

So, even though your student loan may not be dischargeable in bankruptcy, that does not mean it cannot be discharged.  You can effectively achieve a discharge by affordable repayment.

Remember, too, that a Chapter 7 bankruptcy can often help in student loan cases.  Even though your student loans are unaffected whatsoever by your Chapter 7 filing, all your other unsecured debt is wiped out, freeing up your disposable monthly income and allowing you to devote more toward repaying your student loan debt.


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