Q: What happens to student loans in chapter 13 bankruptcy?

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When you file a chapter 13 bankruptcy petition, all collection activity on your student loans will stop, including garnishment.

As part of the bankruptcy process, you’ll file a plan to tell the bankruptcy court what you’re going to do with your debts, including your student loan debt.

The chapter 13 plan will also say whether you’re going to make any of your student loan payments.

The plan will not, however, say that your student loan debt will be discharged. To do that, you’ll have to file an adversary proceeding arguing your loans are dischargeable as an undue hardship.

Are student loans discharged in chapter 13?

You ordinarily can't discharge student loan debt in chapter 13 bankruptcy. Sure, you'll be able to discharge your credit card debt, medical debt, and other personal loans in bankruptcy. But to discharge your student debt, you’ll have to file an adversary proceeding.

An adversary proceeding is simply a lawsuit.

Typically, your bankruptcy lawyer will argue you should be able to discharge student loans because you can't maintain a minimal standard of living for you and your dependents if you’re forced to repay your student loan debt.

The Bankruptcy Code doesn’t define undue hardship. As a result, many bankruptcy courts use the Brunner Test from Brunner v. New York State Higher Education to determine undue hardship.

The Brunner test looks at three things:

  1. Your current income and expenses.
  2. Your future financial situation under the repayment period.
  3. Your good faith efforts to repay your student loan debt.

When to file the adversary proceeding

You can file the adversary proceeding before or after your bankruptcy case ends. Many courts, however, prefer you file the adversary closer to the end of the case. Waiting until then provides clarity about your financial situation, which should make the court’s case easier to determine whether your student loans should be discharged in bankruptcy.

How does chapter 13 affect student loans?

Most chapter 13 plans don’t provide for payment of student loan debt. This is because your plan payments will prioritize paying creditors according to what type of debt they hold.

Here’s what I mean.

Your plan will provide for monthly payments to three types of creditors:

  1. secured creditors.
  2. unsecured priority creditors.
  3. unsecured nonpriority creditors.

Secured creditors get paid first. Secured creditors are creditors who hold secured debts for things like car loans and mortgages.

Next, unsecured priority creditors get paid next. Unsecured priority debts are for taxes, child support, spousal support, etc.

Finally, nonpriority unsecured creditors split evenly any money left. General unsecured debts include credit cards, medical bills, personal loan debt like payday loans, and student loans.

Usually, by the time you get to the last group, there’s no money left to split. As a result, your student loans will go 3 to 5 years without payment. But the interest will continue to run. Depending on the interest rate, your loan balance will be a lot higher at the end of the bankruptcy case.

Fair Discrimination and Student Loans

Ordinarily, you cannot unfairly discriminate in paying one unsecured creditor more than another. Some bankruptcy judges, however, will let you pay your student loans more than you pay other general unsecured creditors. Ask your bankruptcy lawyer if this is an option for you.

If it is, you should be able to pay your loans in an income-based repayment plan.

What happens to student loans after chapter 13 discharge?

When your bankruptcy case is over, your federal student loans will come out of forbearance and be sent to a loan servicer. You’ll need to set up a new repayment plan for your federal loans with that loan servicer.

As for your private student loans, it’s difficult to predict what private loan lenders will do your bankruptcy case ends. They may keep your loans with a loan servicer or they may send them to a collection agency. Typically, you’ll start getting contacted to resume payments about a month or two after you get a bankruptcy discharge.

Can you get student loans after filing chapter 13?

You can get student loans after filing chapter 13 bankruptcy. But you may need to ask the bankruptcy court for permission to do so.

Speak with your bankruptcy attorney before borrowing student loans to make sure you don’t unintentionally violate the Bankruptcy Code.

Final Thoughts

Filing for bankruptcy is a big deal. But for student loan borrowers who don't qualify for loan forgiveness or whose loan payments are too high, filing bankruptcy is the only decision that's going to give them the relief they need.

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