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Managing student loans in Chapter 13 bankruptcy

On Behalf of | Nov 10, 2022 | Chapter 13 Bankruptcy

Many people living in Michigan and around the country believe that it isn’t possible to discharge student loan debt in bankruptcy. While this isn’t entirely true, as the law does allow for the elimination of education debt in cases of extreme hardship, the process isn’t an easy one. Even if you don’t qualify for a discharge, however, you may still be able to effectively manage your student debt in a Chapter 13 bankruptcy.

Student loans and bankruptcy

Changes to the Bankruptcy Code in the 1990s resulted in tougher standards for those who sought this type of debt relief. One of the changes involved student loans: Unless a borrower could prove that repayment of the loan would cause “undue hardship,” the courts would not grant a discharge.

Debtors who suffer undue hardship due to student loan repayment can initiate an adversary proceeding in an attempt to have their school loans discharged. If the bankruptcy judge is satisfied that the debtor’s financial situation is such that repayment would be a severe hardship and that his or her financial circumstances are unlikely to change, the judge could grant a discharge.

Chapter 13 and student loan debt

Filing under Chapter 13 offers debtors the opportunity to retain their assets while agreeing to a three or five-year repayment plan for their debts. After the completion of the plan, the remaining balances of any eligible debts are discharged by the court.

If a debtor pursues an adversary proceeding in a Chapter 13 bankruptcy, and the petition is granted, the student loan debt could be discharged after the repayment plan has been completed.

Even if the debtor doesn’t qualify for a discharge of educational debt, the Chapter 13 bankruptcy does provide the protection of the automatic stay, which prohibits debtors from trying to collect during the repayment plan. Student loan debt would become part of the repayment plan. Due to the repayment and discharge of other debts, the debtor could emerge from Chapter 13 in a better position to continue student loan payments.

Individuals with student loans who are having difficulty making their payments should review their options. They may be eligible for a discharge of their debt. Even if they aren’t, bankruptcy could provide some relief by halting collection activities and freeing up funds that could be applied to the repayment.