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Chapter 13 Should Not Be Confused With Income-Based Repayment

The Pittsburgh Post-Gazette ran an interesting article on private student loan debts and chapter 13 bankruptcy. I wrote on this very topic back in 2013, but the article combines a few additional points about bankruptcy worth discussing.

For one, as far as it goes, the article is correct: Chapter 13 can reduce monthly payments to private student lenders for the duration of the repayment plan. The attorneys interviewed also speculated on the possibility of successive chapter 13 filings to keep those payments low. It’s a very risky strategy for dealing with large private loans.

However, the article refers to chapter 13 as an “income-based repayment” plan, which should not be confused with the government program by the same name (IBR) that applies to federal loans. Hopefully no readers (or debtors considering chapter 13) were confused by that characterization, but the two function somewhat differently.

Specifically, IBR uses a formula to reduce student debtors’ loan payments to a more manageable level. It frees up income for debtors to use for other purposes. Chapter 13, by contrast does not work like that, assuming a petitioner’s goal is primarily to reduce student loan payments. Chapter 13 requires debtors to pay all of their disposable income to the trustee for distribution to the creditors. Consequently, if a debtor’s student loan payments are reduced, it’s because he or she doesn’t have enough income to cover all debts. There’s no “free income” in chapter 13, and for that reason, debtors should not confuse chapter 13 with IBR.

Additionally, the article also raises the issue of how the media reports on debt repayment, and why debtors should be skeptical of articles like this. For example, one individual the author interviewed claimed to owe $80,000 and was making $1,000 monthly payments before filing bankruptcy. Notably, the article does not give the other important details of the repayment plan: the term and the interest rate.

In this case it matters because using a repayment calculator and some guess-and-check estimating, it appears that the interviewee is paying 8.7 percent interest for 10 years. The question should then shift to whether bankruptcy is the best option for him. It might be possible for the debtor to refinance the loan, such as through a credit union, for a lower interest rate, or to try to extend the payment term, like for 25 years. At a 6 percent interest rate for 25 years, the monthly payment falls to $515 per month. That might not have been low enough for this debtor, but others might want to consider that option.

The Pittsburgh Post-Gazette article can be found here.

Student loans can be tricky to deal with and there are options outside of chapter 13 bankruptcy, but it’s worth the time to explore all available options with an experienced bankruptcy lawyer.

For answers to more questions about 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 Lawyer Brooklyn NY Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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