How Student Loans Are Treated In Chapter 13 Bankruptcy

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In this article, you can discover…

• Whether you can discharge student debts in Chapter 13 bankruptcy. 
• The impact of bankruptcy on student debt interest.
• How to best manage student debt during and after bankruptcy. 

Are Student Loan Debts Secured Or Unsecured?

In bankruptcy law, there are two types of debt: secured and unsecured. 

Secured debts are secured by a tangible asset, such as an SUV or a house; if you don’t make monthly car loan or mortgage payments, the creditor will take that asset back through repossession or foreclosure. 

Unsecured debts are not secured by an asset that can be repossessed in the event of a default. They include credit card debt and medical debts.

No lobotomies have been performed in the United States since the 1950s; so the lender who lent you money for your education cannot reach into your head and take back what you’ve learned or experienced. Therefore, student loan debts are also unsecured debts.

Are Student Loans Considered Priority Debts In Bankruptcy?

Congress, in its finite wisdom, has given some types of unsecured debts better treatment in bankruptcy than other unsecured debts. They are called “priority debts.” The complete list is in section 507(a) of the Bankruptcy Code. These debts must be paid in full through a Chapter 13 (or Chapter 11) plan.

Since student debt is not listed as a priority debt in 11 U.S.C. § 507(a), it is a nonpriority debt. 

Can Student Loans Be Discharged In A Chapter 13 Bankruptcy?

No, student loan debt cannot be discharged In a Chapter 13 bankruptcy. While the Biden administration tried to force a mass discharge of student debt, the plan failed because the U.S. Supreme Court held that it exceeded its constitutional authority. In contrast, the Trump administration’s approach to student debt appears to be, “If you took out the loan, you should pay it back.” 

While student debts are not dischargeable in a Chapter 13 bankruptcy, you will still get credit for the portion of student debt you paid through a Chapter 13 plan. However, once you have received your discharge, you will still owe the unpaid portion.

Outside of bankruptcy, it may be possible to discharge your federal student loan debt if you have worked in public service for 10 years while making regular payments. Unfortunately, the discharged debt is counted as income (imputed income from discharge of indebtedness; also called cancellation of debt income), and will be taxed as such. However, any debts discharged in a bankruptcy are not counted as income, so there is no tax consequence.

Will Chapter 13 Reduce The Amount Of Student Loan Debt I Owe?

No, the filing of your bankruptcy petition will not reduce the balance. The balance will only be reduced through payment. You must pay your student loan debt through your Chapter 13 bankruptcy plan. While you are in Chapter 13 bankruptcy, you no longer make payments directly to the student loan lender. Instead, you make a single payment each month to the Chapter 13 Trustee assigned to your case. The Trustee then distributes the monthly payment to your creditors including the student loan lender according to the terms of the repayment plan confirmed by the Judge assigned to your case.

What Happens To Student Loan Interest During Chapter 13?

Unfortunately, student loan interest continues to accrue throughout your Chapter 13 plan. If you’re able to pay off your student debt in full through the plan, interest won’t matter. However, if you don’t pay the debt over the plan repayment period, you will still owe the unpaid portion plus accrued interest after you receive a discharge. 

What Happens To Cosigners On Student Loans During Chapter 13?

A cosigner will be liable for the debt until it is paid in full. However, Chapter 13 provides an important protection for a cosigner. It is called the “codebtor stay,” which protects the cosigner from the depredation of the creditor while the debtor is in Chapter 13. No other chapter of the Bankruptcy Code has the codebtor stay.

If you do not pay your student loan debt through the plan, both you and your cosigner will be liable for the unpaid portion after you receive your discharge. 

What Happens If My Student Loan Payments Are Unaffordable After Chapter 13?

If your loan was a private student loan, you try to negotiate lower monthly payments based on hardship or reduced income.

If your loan is a federal loan, there are programs that may help. For example, if your income is too low to make the full payments, apply for a reduction of the payments through the Income-Based Repayment Plan. 

Can I Improve The Treatment Of Student Loan Debts In My Chapter 13 Repayment Plan?

You can propose to pay a higher percentage of your student debt than you are paying the other nonpriority creditors, as long as you are treating the other creditors fairly.

You can argue that since interest accrues on the student debt unlike on other non-priority debt the student loan lender should get a higher percentage payout equal to the interest that will accrue during the plan divided by the number of months of the plan. Otherwise, you will effectively pay the student loan lender a smaller percentage of the petition date balance over the life of the plan than you will pay to the other creditors.

Of course, the counterargument is that the other creditors will receive less than full payment before the unpaid balance is discharged; whereas you will still have to pay the unpaid student loan balance plus accrued interest after discharge. In sum, you may have a battle on your hands.

You may find it helpful to attach a spreadsheet with the relevant calculations to the plan you propound, to illustrate why your discrimination in favor of the student loan lender is not an unfair discrimination. 

Still Have Questions? Ready To Get Started?

For more information on Chapter 13 bankruptcy and student loans, a free initial consultation is your best next step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.