Student loans remain valid debts after discharge in either Chapter 7 bankruptcy or Chapter 13 bankruptcy. However, paying your student loans in Chapter 13 bankruptcy allows you some breathing room to pay your other debts.
What Is Chapter 13?
Chapter 13 bankruptcy is sometimes called the “wage-earner’s bankruptcy.” Many people who do not qualify for Chapter 7 instead file for Chapter 13. Others want to repay arrearage on missed mortgage payments or other secured debts. Chapter 13 of the bankruptcy code allows you to spread payments out over five years at fixed interest rates.
Certain unpaid, nondischargeable debts, however, “survive” the Chapter 13 discharge. Unfortunately, student loans pass through the Chapter 13 discharge intact. Yet Chapter 13 bankruptcy remains a good option when your student loan payments are so high that you cannot pay your other debts and expenses.
Chapter 13 Bankruptcy Does Not Discharge Unpaid Student Loans
Chapter 13 bankruptcy will not discharge either your public or private student loans. The bankruptcy code defines student loans as nonpriority unsecured debts. You will still owe any unpaid student loan balances after you receive your bankruptcy discharge.
The only way to legally discharge student loans in bankruptcy is to prove that paying them back would be an “undue hardship.” As I have previously written, the undue hardship test is a virtually impossible standard to prove. Undue hardship (otherwise known as the Brunner test) requires that, despite good faith efforts to repay your loans, you cannot maintain a minimal standard of living, and this condition is unlikely to change in the future.
Private student lenders are much more aggressive in debt collection than either state or federal lenders. At the same time, private student lenders sometimes settle for less than what is owed rather than face Chapter 13 payments. In some cases, with student lenders, you can even employ the bankruptcy threat. Federally-backed loans cannot settle for less than what is owed.
Reduce Your Payments on Student Loans in Chapter 13 Bankruptcy
You might still want to consider repaying your student loans in Chapter 13 bankruptcy alongside other nonpriority unsecured debts. During the repayment period of three to five years, Chapter 13 bankruptcy allows you to pay your student loans with reduced monthly payments.
While you are repaying through the bankruptcy court, student lenders are prohibited from taking any collection actions against you. Student loans continue to accrue interest during that time.
And while your student loans will pass through the bankruptcy, Chapter 13 discharges any unpaid amounts on other unsecured debts. So when your case is complete, you should have much more disposable income. You can use those extra resources to pay off your remaining student loan balances more aggressively.
Student Loans After Chapter 13 Bankruptcy
Once you receive your Chapter 13 discharge, you will want to start proactively rebuilding your credit. That also means taking care of any nondischargeable debts, including taxes and student loans.
Contact the student loan servicer and make arrangements to pay them. Once you exit bankruptcy, your creditors may resume collection efforts and can also report any defaults on your credit report. So be sure to have a plan in place to get these loans back on track after bankruptcy.