Filing bankruptcy is never ideal. But when you've tried everything to deal with your student loan debt and your lenders won't help you, filing a chapter 13 bankruptcy case can be the best way forward.
This type of bankruptcy lets you keep your property and allows you to present a repayment plan showing how you're going to repay your debts over the next three to five years. This is why Chapter 13 bankruptcy is often called "reorganization."
As part of that plan, you determine the monthly payments you'll make towards your credit card debt, medical bills, and student loan lenders. You'll also have the opportunity to discharge student loans in bankruptcy.
While many people believe that you can't discharge student loans in bankruptcy, that's not true. Student loans can be discharged, but the process to do so usually requires you to prove you're facing an undue hardship.
What happens to student loans in chapter 13
Here's what happens to your student loans when you file a chapter 13:
- Forbearance: your student loan lender places your loans into an administrative forbearance
- Bankruptcy paperwork: your bankruptcy attorney will list your student loans next to your other unsecured creditors on schedule E/F of your bankruptcy paperwork
- Payment plan: you'll present a plan to the bankruptcy judge and trustee showing how you're going to pay your secured debt (mortgage, auto loan, etc.), unsecured priority debt (e.g., tax debt, child support, etc.), and nonpriority unsecured debt (e.g., student loans, personal loans, etc.)
- Interest: will continue to accrue on your federal and private student loan balance according to the interest rate in the Master Promissory Note (MPN)
- Automatic stay: will stop collection activities (student loan wage garnishment, tax refund offset, and Social Security Benefit offset) against you and your cosigner
- Credit report: will be updated to show that you filed a chapter 13 bankruptcy (the bankruptcy will remain on your credit history for 10 years)
If you successfully complete your bankruptcy case, you'll discharge most, but not all, of your debts.
You'll still owe child support, alimony, some tax debts, and, of course, your federal and private student loan debt.
You can attempt to eliminate your student loan debt by starting another bankruptcy process, called an adversary proceeding—more on that below.
Payment Plan Tip
When creating your chapter 13 plan, there are three special considerations you should ask your bankruptcy lawyer about:
- Debt discrimination. The Bankruptcy Code says that you cannot unfairly pay one unsecured creditor more than another. However, suppose most of your unsecured debt is student loan debt. In that case, you want most of your monthly payment to go towards your loans – especially since student loans are non-dischargeable. Depending on where you live, your bankruptcy judge will consider it fair discrimination if you pay your student loans more than you pay your other unsecured creditors.
- Paying student loans outside of the plan. If the bankruptcy judge allows you to discriminate in favor of your student loan creditors, then you may be able to pay your student loan debt outside the plan. If you can, the second hurdle you'll have to overcome is money. Typically, debtors have just enough money in their budget to make their plan payments. There's usually not enough money left over to make payments outside the plan. But if you're able to make those student loan payments, go for it.
- Public Service Loan Forgiveness. If you work for the government or a nonprofit organization and want to pursue the PSLF Program, you want to keep making monthly payments for your federal student loans under an income-driven repayment plan. Otherwise, you'll miss out on three to five years of credit towards loan forgiveness.
Can you get student loans after filing chapter 13?
Debtors can get student loans after filing their chapter 13 bankruptcy petition. They can get student loans for themselves or borrow student loans for their children (e.g., Parent Plus Loans). But before they can accept the loan proceeds, they have to get the bankruptcy court's permission.
You make your request to borrow student loan debt by asking your bankruptcy lawyer to file a motion seeking to incur debt. You'll need to provide them with the loan payment terms (principal balance, interest rate, repayment period, etc.). It is up to the chapter 13 trustee and, in turn, the judge to approve the motion.
Note. If you're a parent, your bankruptcy filing will not stop your child from qualifying for Federal Student Aid. Your child remains eligible to receive grants, scholarships and borrow education loans in their own name. However, you may lose the ability to qualify for a Parent Plus Loan or a private student loan due to your adverse credit history.
What happens to student loans after chapter 13 discharge?
After you get a bankruptcy discharge, your federal and private student loans will come out of forbearance. Your loans will return to the status they were in before you filed for bankruptcy. So if your loans were in good standing, they'd return to good standing, and you'll need to establish a new payment plan.
If you were in default, you'd need to contact the collection agency handling your loans to determine your options for getting out of default.
And if you had a lawsuit pending against you for defaulted student loans, the lawsuit could continue.
Your options for getting out of default may include:
- loan rehabilitation
- loan consolidation
To locate your federal student loans, check the Federal Student Aid website, studentaid.gov. You can find your private student loans by checking your credit report and contacting the loan servicer who had your loans before and during your bankruptcy case.
Can private student loans be discharged in chapter 13?
Private student loans (and federal loans, for that matter) can be discharged in chapter 13 bankruptcy. However, they are not automatically discharged. You have to file a second bankruptcy process called an adversary proceeding.
An adversary proceeding is a lawsuit filed by debtors and creditors in bankruptcy cases to determine the dischargeability of a debt.
Most bankruptcy filers never file an adversary proceeding to discharge their student loan debt. They've been told it's too challenging to meet the undue hardship criteria.
While I agree it's challenging to discharge federal loans, I believe it's much easier to get a private student loan bankruptcy discharge.
In most places, undue hardship requires student loan borrowers to prove three things:
- Their current income doesn't allow them to repay their student loans, and their minimal living expenses
- Their inability to afford a minimal standard of living and repay their loans will last for the foreseeable future
- They've made a good faith effort to repay their educational debt
These things you have to prove are also known as the Brunner Test.
It's often easier to prove undue hardship for private loans because many borrowers lack the financial resources to afford the monthly payments the lender demand. Private lenders don't offer IDR plans like the Department of Education. Nor do they offer loan forgiveness programs.
Want to discharge your student loans in chapter 13? Let's talk
Trying to meet the student loan bankruptcy burden can be overwhelming. For years, I've helped people just like you get rid of their federal and private student loans in bankruptcy.
Schedule a free 10-minute call with me today. We'll work together to determine the best strategy to deal with your student loans inside and outside bankruptcy.