Student Loans in Chapter 13 Bankruptcy: What You Need to Know

Student Loans in Chapter 13 Bankruptcy: Filing for Chapter 13 bankruptcy can help people who are drowning in debt. It gives them a way to pay back what they owe over a few years. This type of bankruptcy is made for people who still have a steady income but are struggling to stay on top of their bills.

You can create a plan, usually for three to five years, where you make monthly payments. These payments go to a trustee, who then gives the money to the people or companies you owe. While this helps with many types of debt, student loans are a different story.

Student loans don’t go away just because someone files for bankruptcy. Most of the time, you still have to pay them back. But Chapter 13 can still help you deal with them in a more manageable way. Since student loans are counted as nonpriority unsecured debt, they are treated like credit card bills or medical bills in your repayment plan. This means they might only get a small share of the money you’re paying back, based on how much extra income you have after your basic needs are covered.

Student Loans: Are They Secured or Unsecured Debts?

Another big thing Chapter 13 does is stop debt collectors from bothering you while you’re in the repayment plan. This is called an “automatic stay.” It stops things like phone calls, letters, wage garnishments, or even lawsuits, giving you a break from all the pressure. This also includes any action by student loan companies, but only while the bankruptcy case is open.

Can You Get Rid of Student Loans in Bankruptcy?

Technically yes, but it’s very hard. If someone wants to erase their student loans completely, they have to take an extra step called an adversary proceeding. This is like a special case inside the bankruptcy. You have to prove that paying the loan back would cause you “undue hardship.” That’s not easy to prove, and most people don’t succeed. That’s why most folks still have to pay back their student loans even after the bankruptcy plan is over.

This legal standard is difficult to meet and requires proving:

• The debtor cannot maintain a minimal standard of living if forced to repay the loans.
• The financial hardship will persist for a significant portion of the repayment period.
• The debtor has made a good faith effort to repay the loans.

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Also, if someone cosigned your student loan maybe a parent or another family member they are still responsible for the loan. Chapter 13 doesn’t protect them, so the loan company can still ask them for the money. That’s why cosigners need to be aware if the borrower is filing for bankruptcy.

New Rules That Help With Forgiveness

Starting July 1, 2024, new rules have made things a bit better for people with federal student loans who are in Chapter 13. If you’re making your required payments during your bankruptcy case, you can still earn credit toward student loan forgiveness programs. These include Public Service Loan Forgiveness (PSLF) and Income-Driven Repayment (IDR) forgiveness.

You don’t have to make your regular student loan payments while in Chapter 13 to get the credit. As long as you’re making the bankruptcy payments like you’re supposed to, you can get closer to forgiveness. It’s a good idea to include something in your repayment plan that says you’re following this new rule. Once your bankruptcy case is done, you should check with your student loan company to make sure they gave you the right amount of credit.