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Can a Chapter 13 Bankruptcy Affect Your Student Loans?

Piggy bank with graduation cap beside a student loan coin jar

It is fairly common knowledge that you can’t get rid of your student loans by filing for bankruptcy. While there are rare exceptions, student loans are non-dischargeable and will be with you even after the bankruptcy is over. But there are other ways a Chapter 13 bankruptcy affects your student loans. Find out what to expect before you decide if filing is right for you.

This blog post will cover how a Chapter 13 Bankruptcy payment plan can affect your student loans. It will describe how the process affects your payments, collections, and whether you may pay less than the full amount when the Chapter 13 bankruptcy is over.

Student Loans are Non-Dischargeable Debt

Students coming out of college or graduate programs bring with them thousands of dollars of student loan debt. The Class of 2017 owes an average of $28,650, according to the Institute for College Access and Success. Nationwide, that adds up to a total of $1.56 trillion in student loans spread out over 44.7 million borrowers.

Employment trouble, health problems, or other financial concerns can make it hard, or even impossible to keep up with your student loan payments. With such a large debt looming over your head, bankruptcy may seem like a logical choice. But if you choose to file, you will likely come out of bankruptcy still owing your unpaid student loans. That is because student loans have been labelled “non-dischargeable debt”. That means even when all your medical debt or credit cards are wiped clean, your will still have to pay back your student loans. This is true no matter which consumer bankruptcy choice you make: Chapter 7 or Chapter 13.

A Word About Undue Hardship

There is one small exception to the rule that student loans are non-dischargeable debt. Former students who qualify for an “undue hardship” exemption can sometimes get some or all of their student loan debt discharged as part of a bankruptcy. To qualify for an undue hardship exemption you will need to demonstrate that:

  • You couldn’t even maintain a minimum standard of living with your current income and expenses
  • Whatever is causing your hardship will probably continue for a significant period of time (such as a permanent disability)
  • You have made a good faith effort to repay your student loan debt as your income allows

However, this is very rare. Most borrowers will not qualify under this three-part test. While it may be an option in certain unusual circumstances, you should not count on an undue hardship exemption to rescue you from your student loan debt. Instead, you should talk to an experienced bankruptcy attorney to evaluate your options and decide if a Chapter 13 bankruptcy is best for you.

Chapter 13 Bankruptcy Puts a Hold on Student Loan Collections

Neither Chapter 7 nor Chapter 13 bankruptcy options discharge student loan debt. But a Chapter 13 bankruptcy can affect your payments, and how you deal with collections efforts. A Chapter 13 bankruptcy puts an automatic stay on all debt collections, including student loans. That means once your Chapter 13 bankruptcy and payment plan have been filed, you won’t have to deal with collections companies trying to get you to pay back what you owe. That stay can last for 3 to 5 years as you work through your Chapter 13 payment plan.

In the meantime, your Chapter 13 bankruptcy can also reduce your monthly payments and extend the time you have to pay back your student loan debt. When it comes to payments, bankruptcy treats student loans just like any other “non-priority unsecured debts” (including medical bills, credit card debts, and loans from family members). You and your bankruptcy attorney can propose a payment plan that divides up all your disposable income (after allowable expenses like rent and food) between your creditors on a “pro-rata” basis. That means whichever creditors have a higher balance get a higher percentage of your money, but no one creditor can claim to be entitled to everything you have to pay. While you will still be paying your student loans during your Chapter 13 bankruptcy payment plan, it may not have to be at the same, unaffordable amount every month.

What Happens to Your Student Loans When the Bankruptcy is Over

When your Chapter 13 bankruptcy is over, the non-dischargeable nature of student loan debt kicks back in. While the remaining balance on your credit cards and other unsecured debts will be forgiven, you will still owe the rest of your student loans. The loans will also have continued to accumulate interest during the bankruptcy process, which may affect your monthly payments or total loan repayment going forward.

This is why it is so important to talk to an experienced bankruptcy attorney before you decide to file Chapter 13 bankruptcy in the hope it will affect your student loans. If your main goal is to get out from under college debt, there are other, non-bankruptcy options, that may be better suited to your needs.

At John A. Steinberger & Associates, P.C., we know how overwhelming it can feel to face thousands of dollars in student loan debt. We are a full-service bankruptcy law firm in Southeast MI. We serve debtors and families in Southfield, throughout Metro Detroit, and in the surrounding communities. We will help you consider all your options and find the best solution based on your goals and financial circumstances. Call us toll-free at (866) 690-2140 or contact us online to schedule a free initial consultation.

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