Using Chapter 13 Bankruptcy to Manage Student Loans

You can often reduce the amount you pay on student loans during your Chapter 13 bankruptcy.

By , Attorney (Tulane University School of Law)

Although you can wipe out many types of debts in bankruptcy, getting rid of student loans in bankruptcy is difficult. But even if you can't discharge (wipe out) your student loans through bankruptcy, you can often use Chapter 13 bankruptcy to help manage otherwise high student loan payments.

Student Loans are Difficult to Discharge

You can usually discharge unsecured debts, like credit card debt, medical bills, and personal, loans, in bankruptcy. Student loans are also unsecured debts, but bankruptcy treats them differently. Unlike most other unsecured debts, you cannot automatically discharge them in Chapter 7 or Chapter 13 bankruptcy.

To discharge student loans, you must to file a separate lawsuit in your bankruptcy case, called an adversary proceeding. To win that proceeding, you must show the court that paying your student loans will cause you or your dependents a hardship. The standard for proving a hardship differs depending on your jurisdiction but is always a steep obstacle to overcome.

To learn more about what constitutes a hardship, read Student Loan Debt in Bankruptcy.

How to Use Chapter 13 to Manage Student Loan Payments

Even if you can't use bankruptcy to eliminate your student loans, you might be able use Chapter 13 bankruptcy to reduce the amount you pay on your student loans for the length of your bankruptcy case, usually 36 to 60 months.

In Chapter 13 case, you get to keep your property. In return, you must devote your disposable income to the full or partial repayment of your unsecured debts over the life of your plan. In addition to unsecured debts, you can pay some secured debts like car payments, through the Chapter 13 plan, too.

You do this by making a monthly payment to your Chapter 13 trustee. The amount of this payment depends on the property you own, your income, and your reasonable and necessary expenses. Most filers must pay their "disposable income" toward unsecured debt for the repayment period. The trustee distributes this payment among your unsecured creditors, on a pro rata basis.

Calculating your Chapter 13 plan payment is more complicated than the above example. Talk to a bankruptcy attorney to find out how much your Chapter 13 plan payment would be.

How the Bankruptcy Trustee Pays Your Student Loans

As you make your monthly payments to the Chapter 13 trustee, the trustee will forward a portion of your plan payment to your student loan lender. Whether that money will reduce your principal or only cover interest will depend on the terms of your loan. Interest will continue to accrue on your student loans while you are in Chapter 13.

What Happens When Your Chapter 13 Case Is Over?

At the end of the Chapter 13 plan period, your bankruptcy will likely discharge the remaining amounts you owe on your credit cards and other unsecured debts, even if you don't pay those claims in full through your Chapter 13 plan.

The bankruptcy case will not get rid of your remaining student loan debt, however. Your lender will recalculate your payments based on your loan balance at the end of your case and set up a new payment schedule. At that time, you may be in a better position to afford your student loan payments, especially after discharging other debts.

Find out more about discharging debt in Chapter 13.

Applying for Other Student Loan Repayment Programs While in Chapter 13

Being in Chapter 13 doesn't limit your ability to apply for other student loan assistance programs, or to seek consolidation or rehabilitation of student loans. If you qualify for another program that changes your loan terms, you might have to do one of the following:

Modify your Chapter 13 plan to remove the student loans. If the new student loan payment plan is less than the amount your lender is receiving through the Chapter 13 plan, you might be better off removing the lender from your plan, if that option is available in your jurisdiction. Not all bankruptcy courts allow borrowers to remove unsecured creditors from their plans.

Dismiss the Chapter 13 case altogether. If your new student loan payment is reduced or eliminated, you might not need Chapter 13 any longer. If you choose to dismiss the Chapter 13 case, none of your debts will be discharged and you will still be liable for any amounts that weren't paid through Chapter 13. If you qualify for a Chapter 7 case, you might consider converting your Chapter 13 to a Chapter 7 to discharge your other debts. Learn more about converting your Chapter 13 bankruptcy to Chapter 7.

Caveat: If You're in an Income-Dependent Payment Program

Many student loan programs offer to cancel the debt obligation after a number of years—usually twenty to twenty-five. You'll want to find out if you'll receive credit towards those years while in a bankruptcy case before proceeding with Chapter 13. A local bankruptcy attorney should be able to help you find the answer.

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