Use Chapter 13 bankruptcy to help manage student loan debt

March 26, 2013

Use Chapter 13 bankruptcy to help manage student loan debt

In 2012 the Federal Reserve Bank of New York announced that student loan debt in the U.S. was over $1 trillion and had exceeded the total amount of credit card debt in the country for the first time. The situation is only getting worse as 2013 continues on. Many people have experienced the crushing burden of student loan debt while being unable to find employment in the underperforming economy. Those with student loans often feel like they have no options for debt relief, since student loans are not usually dischargeable in bankruptcy. However, people should be aware that Chapter 13 bankruptcy may be a way to help manage their student loan debts.

Bankruptcy and student loans

In general, student loans are not subject to a bankruptcy debt discharge. In rare cases the court may discharge student loans in bankruptcy if the person filing bankruptcy can show that repaying the loans will impose an "undue hardship" on the filer and his or her dependents. Many courts use a three-part test to see if a filer has met the "undue hardship" standard:

-The filer cannot maintain a minimal standard of living while repaying student loans
-The filer's economic circumstances are not expected to change for the duration of the repayment period
-The filer has made a good-faith effort to repay the loans

Chapter 13 bankruptcy may help with student loans

Even though the majority of people cannot discharge student loans in bankruptcy, filing Chapter 13 bankruptcy may still be an option to help manage student loan debt. Chapter 13 bankruptcy may be used to eliminate debts that are dischargeable in bankruptcy, so student loan debts may be more easily repaid.

When a person files Chapter 13 bankruptcy, he or she sets up a repayment plan with his or her creditors. The amount a person pays is based on a percentage of "disposable income" as determined by the court.

The filer makes monthly payments to the trustee for the length of the repayment plan, which lasts from three to five years, and the trustee distributes the money to the creditors based on priority. At the end of the repayment plan, if a filer has made all of his or her payments, the court issues a discharge for all of the filer's eligible debts.

Bankruptcy classifies student loan debts with other unsecured non-priority debts, like credit card and medical debt. As such, the trustee will distribute a portion of the repayment plan funds to the student loan lender. However, be aware that interest will still accrue on the unpaid portion of their student loans during the repayment plan period.

Another way Chapter 13 can help people manage student loan debt is through the automatic stay. Once a person files bankruptcy, the court issues an automatic stay on all collection actions, which means that lenders cannot pursue a person for payment of debts during the bankruptcy process. The stay includes student loan creditors.

Finally, even though people still need to repay student loan debts after filing bankruptcy, Chapter 13 can effectively relieve people from other debts and allow them to emerge from bankruptcy in a better financial position. By eliminating the debts that are dischargeable in bankruptcy, people are able to repay student loan debts more easily.

Speak with an attorney about your student loans

Deciding to file bankruptcy is not something a person should do lightly. Filing bankruptcy can be complicated, and it is best to seek the advice of a board-certified bankruptcy lawyer who can help navigate the bankruptcy process successfully.

Article provided by David F. Cannon
Visit us at www.nashvillebankruptcylaw.com