Can Chapter 13 Bankruptcy Discharge Student Loans?

• You typically can’t discharge student loans in Chapter 13 bankruptcy, but you can include them in your repayment plan to help manage the debt.

• You can include both federal and private student loans in your Chapter 13 repayment plan, potentially lowering your monthly payments.

• Starting July 1, 2024, you’ll earn credit towards loan forgiveness programs for each month you make Chapter 13 plan payments, even without direct loan payments.

Chapter 13 bankruptcy typically does not result in the discharge of student loans. Unlike other forms of consumer debt, student loans have special protections under bankruptcy law that make them much more difficult to eliminate.

To discharge student loans in Chapter 13 bankruptcy, you must prove that repaying the loans would cause “undue hardship.” This requires filing an additional lawsuit (known as an adversary proceeding) within your bankruptcy case. Courts use strict tests like the Brunner Test to determine undue hardship. You must generally demonstrate that:

1. You cannot maintain a minimal standard of living if forced to repay the loans.

2. Your financial situation is likely to persist for a significant portion of the repayment period.

3. You have made good-faith efforts to repay the loans.

Meeting all these criteria is challenging, and successful student loan discharge through this method is rare. But most borrowers who file Chapter 13 bankruptcy will find that their student loans survive the process.

But even if discharge isn’t possible, Chapter 13 bankruptcy can still provide significant benefits for managing student loan debt. It allows you to reorganize your debts and create a three- to five-year repayment plan. During this time, you may be able to reduce or pause your student loan payments, giving you breathing room to address other financial obligations.

Additionally, starting July 1, 2024, new regulations will allow Chapter 13 filers to make progress toward loan forgiveness during their bankruptcy, even if the loans aren’t discharged. This change could make Chapter 13 bankruptcy a more beneficial option for student loan borrowers, which we’ll discuss in more detail later.

Related: Can You File Bankruptcy On Student Loans?

While Chapter 13 bankruptcy doesn’t typically discharge student loans (find out why) it can impact how you manage this debt. In a Chapter 13 bankruptcy, you propose a repayment plan to pay off a portion of your debts over a 3 to 5-year period.

Here’s how this process specifically affects your student loans:

1. Automatic stay: When you file for bankruptcy, an automatic stay goes into effect, stopping collection actions on all debts, including student loans. This provides temporary relief from payments and collection efforts.

2. Treatment of student loans: Student loans are typically treated as nonpriority unsecured debts, meaning they’re paid alongside other unsecured creditors in your repayment plan.

3. Administrative forbearance: During your Chapter 13 case, federal student loans are usually placed in administrative forbearance. This means you’re not required to make direct payments on these loans while in bankruptcy.

Starting July 1, 2024, new Department of Education regulations will provide an additional benefit. You’ll receive credit toward both Public Service Loan Forgiveness (PSLF) and Income-Driven Repayment (IDR) loan forgiveness programs for each month you make required payments under your confirmed Chapter 13 plan.

This credit applies even if you’re not making direct student loan payments during bankruptcy and regardless of whether you’re enrolled in an income-driven repayment plan. This change means you can make progress toward eventual loan forgiveness while addressing your overall debt through bankruptcy.

You can include private student loans in Chapter 13 bankruptcy. Private student loans are treated as nonpriority unsecured debts in your repayment plan, similar to credit card debt. But they receive different treatment in Chapter 13 bankruptcy compared to federal loans.

Here are key points to understand:

• Private loans are treated as nonpriority unsecured debts in your repayment plan, similar to credit card debt.

• Interest on private student loans continues to accrue throughout your bankruptcy.

• Your Chapter 13 plan payments may not cover the full amount due on your private loans each month. Instead, your lender will receive a pro-rata share of your monthly payments to the bankruptcy court.

• Due to ongoing interest and potentially insufficient payments, your private loan balance may be significantly higher after completing your plan.

• Unlike federal loans, private loans don’t offer income-driven repayment plans or loan forgiveness programs after bankruptcy.

For high earners, the difference in treatment can be stark:

• With federal loans, you might pay little or nothing directly towards these loans during bankruptcy yet still earn credit towards forgiveness programs.

• With private loans, your balance could grow substantially over the 3-5-year plan period due to continued interest accrual and insufficient payments.

While Chapter 13 bankruptcy can provide temporary relief from private student loan payments, it may lead to a more challenging situation post-bankruptcy. The automatic stay will halt collections during your case, but you’ll face the full remaining balance, including accrued interest, once your plan is complete.

For a more detailed look at how bankruptcy affects private student loans specifically, see our article: Private Student Loan Bankruptcy: What You Need to Know.

When you file Chapter 13 bankruptcy, your cosigners are not filing bankruptcy themselves. Your bankruptcy won’t appear on their credit report, preserving their credit score. Additionally, the bankruptcy’s automatic stay pauses collection actions against both you and your cosigners for cosigned student loans.

Here’s what else you and your cosigners need to know:

• Duration of protection: This “co-debtor stay” lasts for the duration of your Chapter 13 plan, usually 3 to 5 years.

• Chapter 13 vs. Chapter 7: This cosigner automatic stay protection is unique to Chapter 13 bankruptcy. In Chapter 7, cosigners don’t receive this protection and may still face collection actions.

• Limits of protection: Creditors can petition the court to lift the stay against cosigners in certain circumstances, such as if your Chapter 13 plan doesn’t propose to pay the debt in full.

• Payment implications: If monthly payments after bankruptcy, it could negatively impact your cosigner’s credit, even though your bankruptcy itself doesn’t appear on their credit report.

After your Chapter 13 plan is complete, cosigners remain legally responsible for any unpaid portion of the cosigned loans. Your discharge doesn’t affect their obligation. This means if you were to file an adversary proceeding and got your student loan debt discharged, your lender could still try to go after your cosigners for payment. This is why I typically use the adversary process to negotiate settlements that release both you and the cosigner.

Related: How to Remove a Cosigner From a Student Loan

You can still get Public Service Loan Forgiveness credit while in Chapter 13 bankruptcy.  The new Department of Education regulations allow you to earn credit towards PSLF during your bankruptcy.

Here’s what you need to know:

• Credit without direct payments: You’ll receive credit toward PSLF for each month you make required payments under your confirmed Chapter 13 plan, even if you’re not making direct student loan payments.

• No proof of claim required: You’ll receive credit even if the Department of Education doesn’t file a proof of claim or receive distributions under your plan.

• Partial plan completion counts: If your case is dismissed before completion, you’ll still receive credit for the months you made plan payments.

• No separate classification needed: You don’t need to separately classify your student loans in your Chapter 13 plan to receive this benefit.

To get the most from these benefits:

1. Include a plan provision requiring compliance with the new regulation.

2. Verify your forgiveness credit at case closing by checking the Chapter 13 Standing Trustee’s Uniform Final Report and Account.

3. Provide a copy of this report to your student loan servicer.

4. Consider filing a motion to obtain a court order confirming the number of plan payments made if you can’t verify that your servicer has given you proper credit.

Related: Can You Get Financial Aid While in Chapter 13?

Dealing with student loans in Chapter 13 bankruptcy can be complex, but it offers potential benefits for managing your debt. While discharge is rare, Chapter 13 can provide breathing room and, starting July 2024, progress toward loan forgiveness.

Each situation is unique, and the best approach depends on your specific circumstances, loan types, and financial goals. A student loan bankruptcy lawyer can help you understand your options and develop a strategy tailored to your needs.

For personalized advice on how Chapter 13 bankruptcy might impact your student loans, consider booking a call with one of our expert student loan bankruptcy lawyers.