What Happens to Student loans in Chapter 13 Bankruptcy?

‍Filing Chapter 13 bankruptcy stops payments, garnishments, and lawsuits for student debt. It can even wipe out education loans — if the borrower proves undue hardship. Plus, it allows filers to get new student loans during and after their bankruptcy case.

Chapter 13 bankruptcy lets you catch up on your mortgage and car note and get rid of medical bills and credit card debt by making payments over three or five years. Your student loan debt can go away if you file an adversary proceeding, which is a separate bankruptcy process, and prove undue hardship. And if you need to get financial aid to pay for school for yourself or your child, you can still borrow federal and private student loans during and after your bankruptcy case.

Below, learn what happens to student loans in Chapter 13, including how to discharge them or borrow more if needed.

Latest on student loans

• ITT Tech & Art Institute Settlement: Navient has agreed to wipe out $1.7 billion in private student loans.

• Forgiveness update: $10,000 student loan forgiveness may happen later this year.

• Covid-19 forbearance extended: The latest student loan payment pause moved the repayment start date to May 2, 2022.

• Get out of default: Learn how to get out of student loan default.

When you file Chapter 13 bankruptcy, monthly payments for student loans stop, garnishments and lawsuits freeze, and your account is placed into forbearance due to the automatic stay. Your student loans will be listed on your bankruptcy paperwork alongside bills for credit cards, medical expenses, and other nonpriority unsecured debts. Those debts will likely get a small piece of the Chapter 13 plan payments you make to the trustee. The bulk of the money will go to your mortgage, car loan, past-due taxes, and your bankruptcy lawyer.

Here’s what else happens to student loans in Chapter 13:

• Interest will continue to build. Interest continues to accrue on the loans throughout your case. If your interest rate is high, your loan balance could be thousands more than you initially borrowed by the time you get your bankruptcy discharge.

• No credit for loan forgiveness. Unless your plan allows you to keep making student loan payments outside of bankruptcy, you won’t earn any credit towards the Public Service Loan Forgiveness Program or income-driven repayment plan forgiveness during the next three to five years.

• Your cosigner is protected. The automatic stay protects you and your cosigner when you file bankruptcy. Lenders won’t demand payment from them or sue them for nonpayment. Their credit scores should also be safe. The bankruptcy shouldn’t be listed on their credit report. It can be removed if it is. You can click here to learn how to dispute student loans on credit report.

After your Chapter 13 ends, the bankruptcy judge will sign a discharge order wiping out debts from unsecured creditors. But you’ll still owe debts for child support, alimony, and your private and federal student loans.

A few weeks after the bankruptcy court closes your case, student loan creditors will remove the forbearance from your account and start contacting you for payment. Let your loan servicer know your financial situation and see if they can set you up in a payment plan based on your income.

If you were facing student loan wage garnishment before filing bankruptcy, you’ll have to deal with it when your case ends. The same goes for any pending lawsuits.

Learn More: How to Apply for Student Loan Forgiveness

The bankruptcy code prevents the Department of Education from denying federal student aid to someone who has been in bankruptcy. But this law doesn’t apply to private lenders. If you don’t have a good credit score and enough income to cover your living expenses plus the student loan payments, you may need a cosigner to get approved.

Before you can borrow student loans, or any new debt, in Chapter 13, you have to get permission from the trustee. You’ll also need to prepare a plan showing:

• How continuing your education will help you repay your debts.

• The new student loan debt won’t stop you from making your plan payments.

• You can pay back the student loan.

• How the degree will increase your employment prospects and earning potential.

Student loan consolidation or refinance may be considered new debt in your jurisdiction. Check with your attorney before you apply for either type of loan.

Once your case ends, you’re free to borrow new federal and private student loans. But you may have difficulty getting approved.

For the next five years, the Education Department will stop you from borrowing Parent PLUS Loans and Graduate PLUS Loans without a cosigner (“endorser”) due to having an adverse credit history. You can appeal the denial for extenuating circumstances and ask the department to use its discretion and approve your application.

Once your credit score rebounds, private student loan lenders are willing to give you money to go back to school or refinance for a lower interest rate. But they may require a cosigner. You can shop around for the best rates and terms using credible.com.

Learn More: Parent PLUS Loans during Chapter 13.

To discharge student loans in Chapter 13, you’ll need to file a lawsuit in your case called an adversary proceeding. In it, you’ll tell the bankruptcy judge that you should be able to get rid of your student loan debt because repaying it causes an “undue hardship” to you and your dependents.

The evidence needed to meet that standard is interpreted differently depending on where you live. Some jurisdictions have the judge review a “totality of the circumstances” for the borrower and decide. Others use a less flexible standard, the Brunner Test, that grants a discharge only if the judge answers “yes” to three questions:

• Have you made a good-faith effort to repay the loans?

• Are you unable to maintain a minimal standard of living while making the payments?

• Is your financial situation likely to persist throughout the student loan repayment period?

Check with your bankruptcy attorney to see if you can file the adversary proceeding at the start of your case or near the end.

Learn More: Can Private Student Loans Be Discharged in Bankruptcy?

By itself, filing bankruptcy can be overwhelming. Add student loan debt, and it can leave you feeling hopeless — especially if you don’t have help from a student loan bankruptcy lawyer like me.

Schedule a call with me today. Let’s talk to figure out the best strategy to deal with your student loans inside and outside bankruptcy. That way, you can get the fresh start you deserve.

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