Except in rare circumstances, student loans cannot be discharged in bankruptcy. But if you are struggling to make your student loan payments, filing for Chapter 13 bankruptcy can allow you to delay or reduce your monthly obligations. Read on to learn more about how Chapter 13 bankruptcy can help you manage your student loan debt.
(Learn the basics of how Chapter 13 bankruptcy works.)
Student Loans Are Generally Nondischargeable in Bankruptcy
Your bankruptcy discharge does not wipe out certain types of debt. These are referred to as nondischargeable debts. Unfortunately, student loans are one of them.
Generally, the only way to discharge student loans through bankruptcy is to prove that paying them back is an “undue hardship” for you. This is extremely difficult to prove and is usually only granted in rare circumstances (such as severe disability). As a result, in almost all cases, you will still be required to pay back your student loans after receiving a bankruptcy discharge.
(To learn more about the undue hardship test for student loans in bankruptcy, see Student Loan Debt in Bankruptcy.)
Student Loans Are Treated As Nonpriority Unsecured Debts in Chapter 13 Bankruptcy
In Chapter 13 bankruptcy, student loans are treated as nonpriority unsecured debts just like credit cards and medical bills. This means that you are not required to pay them off in full through your Chapter 13 repayment plan. Student loans receive a pro-rata share of the total amount paid to unsecured creditors in your plan (this amount depends on your income and expenses). As a result, Chapter 13 bankruptcy can help delay or reduce your monthly student loan obligations during the life of your bankruptcy (discussed below). However, once your Chapter 13 bankruptcy is over, you must continue to pay your student loans.
Under certain circumstances, you may also be able to continue making student loan payments outside of bankruptcy. However, whether you can do this depends on where you live. Most jurisdictions do not allow debtors to pay student loans outside of bankruptcy because they believe it unfairly discriminates against other unsecured creditors by reducing the amount they get paid through the bankruptcy.
How Chapter 13 Bankruptcy Can Help You Manage Your Student Loan Obligations
Even though student loans are not dischargeable in bankruptcy, filing for Chapter 13 can help you delay and manage your monthly obligations. The following are some of the ways Chapter 13 bankruptcy can help you.
The Automatic Stay Prohibits Student Loan Collection
When you file for Chapter 13 bankruptcy, an automatic stay goes into effect that prohibits almost all creditors (including student loan lenders) from trying to collect their debts. This means that Chapter 13 bankruptcy can stop your student loan company from harassing you during your bankruptcy (which can last as long as five years). (Learn more about bankruptcy's automatic stay.)
Chapter 13 Bankruptcy Can Delay Student Loan Payments
Since you are protected by the automatic stay, you do not have to make regular student loan payments during Chapter 13 bankruptcy. Your student loans will be paid through your Chapter 13 payments according to the terms of your plan. If you have little or no disposable income, you may not have to pay anything towards your student loans in your repayment plan. However, keep in mind that interest will continue to accrue on your student loans during bankruptcy and you will still be required to pay them back after your case is closed. (Learn more about how payments are determined in Chapter 13 bankruptcy.)
Chapter 13 Bankruptcy Can Reduce Your Monthly Obligations
You can still pay back a portion of your student loans through your Chapter 13 plan. The benefit of Chapter 13 bankruptcy is that you only pay back what you can afford. If you cannot afford your regular student loan payments, you can lower your monthly obligations by paying a smaller amount through your Chapter 13 plan. Since Chapter 13 bankruptcies can last as long as five years, this can allow you time to increase your income and more easily afford your payments after bankruptcy.
For nonbankruptcy methods of dealing with student loan payments (including consolidation, forbearance, and reasonable and affordable payment plans), see our Student Loan Debt topic.