Many folks who come into our office are carrying mountains of long term student loan debt. The good news is a lot of people are in the new income based repayment plans that are being offered. I previously wrote about some of these plan here.
There are also some circumstances where student loans can be discharged in bankruptcy, although the requirements to prove hardship are very stringent and, therefore, it is very difficult to attain a hardship discharge of Student loan debt, whether public or private. Robert Reese recently wrote about some hardship options. The current precedent that sets the standard for hardship discharge, called the Brunner test is now being challenged and we hope that will bring some changes to allow more folks to discharge their student loans when they have become too burdensome.
Another Student Loan Debt Option
What I want to discuss here, is another option that may be available for managing long term student loan debts. That is filing a chapter 13 bankruptcy, or debt consolidation, to pay some or all of the debt over a 3 or 5 year period. If you are up to date on your student loan repayment and are in good standing, this option may not make sense even if you are experiencing other financial issues for which you need to file a chapter 13. It may be best to continue paying the student loan creditor direct to maintain good standing. Trying to pay a long term student loan in a Chapter 13 is not always ideal. So much so, that I often refer to this process as a “band-aid”. However, if your paycheck is being levied or garnished by your student loan creditor or you are in default with your student loans, the chapter 13 plan is probably one of your best options.
Pro Rata Plan
Most people who file a chapter 13 plan, file a pro rata plan. In this time of the plan all of your unsecured creditors receive a percentage of what you owe and the remaining balances are discharged at the end of your chapter 13 plan term. Ed Woods recently wrote about chapter 13 plans and how they work. Your student loan debt is an unsecured claim against your bankruptcy estate and any student loan creditor can file a claim in your chapter 13 to share in the percentage distribution. Including your long term student loan debt in your chapter 13 plan will immediately stop any levy or garnishment of your wages and prevent any student loan creditor from taking money from your pay or tax returns for the term of your chapter 13 plan.
Depending upon your ability to pay, you may be able to opt to subclass your student loan debt and pay the principal in full throughout the life of your chapter 13 plan. This is advantageous because unlike other general unsecured creditors, the balance of a student loan is not discharged at the end of a chapter 13 plan. This can be reviewed with your attorney on a case by case basis. Paying some or all of your student loan debt through a chapter 13 can be a benefit to you in the long run as compared to long term deferments of payment that can result in a mountain of interest accrual on the debts.
If you are having problems with your student loan debt or need to discuss any financial difficulties, contact our Bond & Botes office nearest you to schedule a free consultation with an attorney to discuss the options available to you.
Amy K Tanner is a shareholder in several of the Bond & Botes Law Offices. She holds a Bachelor of Science from Auburn University at Montgomery, and a Juris Doctorate from Thomas Goode Jones School of Law. She focuses primarily on consumer bankruptcy law in the Huntsville and Decatur offices.Read her full bio here.