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Using Chapter 13 Bankruptcy to Repay Your Student Loans

Student loan repayments can be overwhelming, especially when the monthly payment looks more like a mortgage payment. Many people who are graduating from school are finding themselves with huge student loans, and in jobs that do not offer enough income to meet their necessities and also cover the monthly student loan payments. Although there are several programs available to assist with the repayment of federal student loans, many private student loans have been unwilling to provide affordable payment plans. Federal student loans offer the Income Based Repayment program which is intended to decrease your monthly payment to an affordable rate based on your income and household size. Private student loans do not qualify for the Income Based Repayment program. Even under some of these programs the proposed payment amount may be beyond what is affordable to a person.

What relief is available if you cannot manage your student loan payments and you are being threatened with garnishment? One option is to seek relief under the bankruptcy code. Although many individuals many not qualify to have their student loans discharged as part of a bankruptcy, they can still use bankruptcy to repay their student loans with an affordable payment.

Chapter 13 bankruptcy allows individuals with student loans to consolidate their student loans into an affordable payment plan that is made over 36 to 60 months. This can be a great incentive to someone who is facing a garnishment from student loans and the creditor is unwilling to work out an affordable monthly payment. Once the Chapter 13 plan is filed, any garnishment or collection efforts from the student loans must cease. As part of the Chapter 13 plan,  a payment is proposed that offers to pay all of your unsecured creditors (including student loans) all of your disposable income. The offered payment can be significantly lower than what is required from the student loan company.

You can still file for Chapter 13 bankruptcy to repay your student loans, even if you have recently filed a Chapter 7 bankruptcy and received a discharge of your other debts. The Chapter 13 bankruptcy can simply be used to set up a reasonable repayment amount for your student loans.

Once you complete your Chapter 13 repayment plan, any remaining balance that is unpaid on your student loan will still be your responsibility. If after completing your Chapter 13 plan, your circumstances have not changed enough to allow you to repay the required amount on the student loans, then you may need to consider filing another Chapter 13 bankruptcy.

If used properly Chapter 13 can be a powerful tool to pay your student loans. To determine whether Chapter 13 bankruptcy can help you lower your monthly payments, have your budget reviewed by a local bankruptcy attorney. An experienced lawyer should be able to give an estimated payment amount for your Chapter 13 plan at the initial consultation.

 

Comments

In our district there is no requirement that student loans be paid in full as part of a Chapter 13 plan. As a colleague mentioned before there are some districts that require that the student loans by paid in full. Student loans in the Central District of CA are treated like other unsecured creditors and are not required to be paid in full as part of a Chapter 13 plan.
It's my understanding (regardless of the district) that student loans do not take priority over other debts, [even unsecured debts], in the plan. So if a debtor includes other debts in the plan, the Trustee will allocate payment to non priority creditors first.. and student loans secondary.

This causes student loans to not be adequately treated in chapter 13 bankruptcy. The student loan arrears can obviously be cured in the plan, but if we're talking about tens of thousands of dollars in loan debt, I can't imagine how squeezing the loan underwritten for greater than 10 years in most cases, into a 60 month plan could ease someone's financial burden.

The income needed to fund this plan would have to be so high that you would have to question why the person is filing bankruptcy in the first place. And everyone that files for 13 may not qualify for the 5 year plan instead will have the 3 year.

Norma, I've never heard of student loans being required to be paid in full. I think it's horrible that your central district of CA is forcing debtors to do that. I'm curious to know if the appellate court in your district sees it the same way..

Thanks for the article..

Alex Frias
If it is a private student loan than the creditor can sue you and try to garnish wages, levy bank accounts, or attempt other collection methods, but cannot garnish your social security benefits. The creditor cannot garnish your social security benefits for private student loans. If the student loan is a federally insured or guaranteed student loan then your social security benefits may be subject to garnishment for that student loan. Chase bank cannot go after your social security benefits for the private student loan.
I Co-signed for two student loans from Chase Bank for my daughter. Chase Bank indicates to her these are "private" school loans. I am ready to retire and will be collecting Social Security soon. I have been making the monthly payments to Chase Bank for these two private school loans but cannot afford to do this much longer. If I stop making these payments, can Chase Bank garnish my Social Security checks? She is unable to make the payments as well as she is still in school and Chase Bank refuses to put these loan into deferrment.
In the Central District of California, the student loans are included as part of the Chapter 13 plan but it is not required that the principal be paid in full. There is no requirement that there be no principal outstanding at the end of the 60 months. As for filing of sequential Chapter 13 bankruptcy cases to pay your student loans, this may depend on your region and whether this would be considered bad faith. I have had a number of colleagues file sequential Chapter 13 bankruptcy cases to assist the debtor in reducing the payments for student loans in our area.
I'm not sure how it works in California, but in the Northern District of Georgia (where I practice) a debtor can include student loan debt in a Chapter 13 but the plan must pay the entire debt - in other words, at the end of 60 months, there should be no principal outstanding. However, interest will continue to accrue, meaning that the debtor may get a substantial bill for interest after the plan completes. Are you certain about the legality of filing sequential Chapter 13 plans to pay off student loans?

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