It’s rare for debtors to successfully discharge their student loans in bankruptcy, and now that the federal government offers income-sensitive repayment plans to borrowers, it’s a little easier for those who can’t pay to avoid default. Unfortunately, many debtors have private loans, or they’re already in default on their federal loans, which means filing a chapter 7 bankruptcy might not help. That does not, however, imply that filing in chapter 13 isn’t worthwhile.
One might ask what the point is. The chapter 13 discharge isn’t likely to apply to the education debts, and for two reasons the students loans are probably going to be paid last out of the income that goes to the repayment plan, if they are paid on at all. First, education loans are unsecured, and second, they are not “priority” unsecured debts, like child support arrearages and tax debts. Thus, student loans will be intact after exiting chapter 13, and they will accrue significant interest along the way, so why bother with chapter 13? There are several reasons.
(1) Like chapter 7, any unsecured debts that are unpaid after a chapter 13 bankruptcy are discharged, which leaves debtors with more income with which to repay the student loans. For those with significant credit card debt, it’s possible that this income can cover the accrued interest. Likewise, other benefits of chapter 13 can free up income, like stripped liens from discharged secondary mortgages and crammed-down loan payments on cars.
(2) One of the primary benefits of chapter 13 for student debtors is time. The 3- to 5-year repayment plan can keep debtors out of default long enough to find higher-paying work. Maybe some debtors can expect an inheritance in a few years, or they may have a partner who is completing school and will be able to work soon. Chapter 13 also benefits debtors with a longer automatic stay against collections, which is beneficial for those who are at or near default on their student loans.
(3) For those in truly dire circumstances, it’s possible to file successive chapter 13 bankruptcies to keep the student loan creditors away. Chapter 7 doesn’t allow a discharge in that chapter for eight years. Chapter 13 bankruptcies, on the other hand, can be filed continuously, except those seeking a second discharge will have to wait two years from the previous discharge to file.
(4) Finally, private student loan creditors don’t always object to discharge, so some debtors might be fortunate to clear their loans after completing a chapter 13 bankruptcy.
Although the bankruptcy code isn’t kind to student loan debtors, there are instances when a chapter 13 case might be worth the effort.
For answers to more questions about student loans, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Chapter 13 bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.
