What Happens to Student Loans in Chapter 13?
If you are struggling with student loans and considering bankruptcy, you may wonder how filing will affect these debts. What happens to student loans in Chapter 13? In most cases, student loans are not discharged in Chapter 13, but you can include them in your repayment plan to stop collection and manage your payments while under court protection. Chapter 13 bankruptcy allows you to reorganize your debts and create a three- to five-year repayment plan.
If you have questions about bankruptcy and want straightforward answers, call 877-586-1829 today to speak directly with a bankruptcy lawyer. For 15 years, we’ve helped over 10,000 clients protect their rights during bankruptcy.
In this article, you will learn what happens to your student loans in Chapter 13, payment structure, protection benefits, dischargeability process, planning considerations, and what to expect after your case concludes.
How Does Chapter 13 Impact Student Loan Repayment
When you file Chapter 13, you can include your student loans in your repayment plan. This means you can include both federal and private student loans, potentially lowering your monthly payments. If you have little or no disposable income, your repayment plan may not require any payments toward your student loans.
- You may pay less than the full monthly payment.
- Collections and garnishments stop during the plan.
- You can focus on catching up with other debts while maintaining minimum payments on your student loans.
Can Student Loans Be Bischarged Through Undue Hardship in Chapter 13
Student loans are not automatically discharged in Chapter 13, but you can file an adversary proceeding to request a discharge by proving undue hardship. Courts may use the Brunner Test to evaluate undue hardship claims. The Brunner Test is often used to determine undue hardship.
- Whether you cannot maintain a minimal standard of living if forced to repay.
- Whether your financial situation is likely to persist.
- Whether you have made a good faith effort to repay.
The criteria for undue hardship are difficult to meet and typically involve conditions like severe disability.
How Does Chapter 13 Protect You From Student Loan Collections
Filing for Chapter 13 triggers an automatic stay, which means you are not required to make regular student loan payments while the bankruptcy case is ongoing.
- Stops wage garnishments.
- Halts collection calls and lawsuits.
- Prevents aggressive collection actions during your repayment plan.
Should You Continue Paying Student Loans
If your income allows, continuing to pay your student loans during Chapter 13 can reduce the balance and interest that will accrue during your plan, minimizing your debt post-discharge. However, interest will continue to accumulate on your student loans throughout the bankruptcy process, and you will remain responsible for repaying them once your case concludes.
Can Chapter 13 Help Prevent Default on Student Loans
Yes, including student loans in your Chapter 13 can allow you to repay some of your student loans through your plan by paying a smaller amount aligned with your ability to pay.
- Pause collection activity to prevent default.
- Allow you to make manageable payments while addressing other debts.
- Provide time to explore loan rehabilitation or consolidation after your case. The U.S. Department of Justice has recently streamlined the adversary proceedings for discharging student loans.
How Does Chapter 13 Affect Co-Signers on Student Loans
If someone co-signed your student loans, Chapter 13 can protect co-signers by halting collection efforts against them during your case, giving you time to manage the debt without jeopardizing their finances. This protection, known as the co-debtor stay, lasts for the duration of your Chapter 13 repayment plan, typically three to five years.
It prevents lenders from pursuing co-signers for payments or legal action while your bankruptcy case is active. However, once the bankruptcy case concludes, this protection ends, and co-signers may again be held responsible for the loan if you default. Therefore, it’s important to communicate with your co-signers about your bankruptcy and repayment plan to ensure everyone understands their rights and obligations during and after the process.
Can Chapter 13 Help with Private Versus Federal Student Loans
Chapter 13 treats federal and private loans similarly regarding repayment during the plan, but understanding the differences is critical for strategy. Federal student loans may qualify for income-driven repayment (IDR) plans or student loan forgiveness programs after your Chapter 13 case ends, which can help manage student loan debt more effectively. Starting July 1, 2024, you can earn credit toward loan forgiveness programs for monthly Chapter 13 payments, even if your loans are not discharged.
In contrast, private student loans typically do not offer these benefits and may continue to accrue interest throughout the repayment period, potentially increasing your loan balance. Additionally, private loans are treated as nonpriority unsecured debts in the bankruptcy process, meaning they receive a pro rata share of payments along with other unsecured creditors. In Chapter 13 bankruptcy, student loans are classified as nonpriority unsecured debts, similar to credit card balances and medical expenses.
What Are Common Mistakes to Avoid When Handling Student Loans
Mistakes such as ignoring interest accrual, failing to explore IDR plans, or not aligning your Chapter 13 payment strategy with your post-bankruptcy goals can leave you with an unmanageable balance after discharge. Interest on student loans continues to accrue during your Chapter 13 repayment period, which can significantly increase your loan balance if not accounted for.
Additionally, income-driven repayment (IDR) plans can offer lower monthly payments and potential loan forgiveness, so exploring these options before and after bankruptcy is crucial. Not coordinating your repayment plan with your long-term financial goals may result in unexpected financial strain once your bankruptcy discharge is complete.
Advanced Planning Tips for Managing Student Loans
Should You Consider Income-Driven Repayment Plans Before Chapter 13
Before filing Chapter 13, evaluate whether an income-driven repayment plan (IDR) might provide a lower payment without needing bankruptcy, preserving your eligibility for federal benefits and forgiveness programs.
How to Strategically Structure Your Chapter 13 Plan with Student Loans
Your attorney can structure your Chapter 13 plan to:
- Prioritize secured and necessary debts while including loans in your plan.
- Allocate any disposable income toward loans if beneficial.
- Protect your assets while stabilizing your financial situation.
What to Expect with Student Loans After Completing Chapter 13
After your Chapter 13 discharge, you will remain responsible for any remaining student loan balances. Starting July 1, 2024, you’ll earn credit towards loan forgiveness for each month you make Chapter 13 plan payments. You can:
- Resume payments under an IDR plan.
- Consider refinancing or consolidating to lower interest rates.
- Continue seeking discharge options if your circumstances change.
At Kostopoulos Bankruptcy Law, we help Californians navigate managing loans through Chapter 13 while protecting assets and ensuring they have a clear financial plan post-discharge.
Call (877) 969-7482 or schedule your confidential consultation online to review your situation.
Further Reading:
- Who Qualifies for Student Loan Forgiveness
- How to Apply for Student Loan Forgiveness
- How to Stop Student Loan Wage Garnishment
Resources
- U.S. Courts Bankruptcy Basics
- California Courts Self-Help Bankruptcy
- Federal Student Aid – Student Loan Repayment
- National Consumer Law Center