Student Loans: How to Pay Them in a Chapter 13 Bankruptcy

31 Oct Student Loans: How to Pay Them in a Chapter 13 Bankruptcy

Unless the bankruptcy debtor can satisfy the daunting legal standard of “undue hardship,” student loans are not dischargeable in a bankruptcy case. However, the mere fact that student loans will not be discharged does not mean you should give up on the bankruptcy process. For a chapter 13 debtor, the question might be, how should the chapter 13 payment plan propose to treat the student loan debt?

There is an easy way to distribute more of the debtor’s income to student loan debts than to other debts: simply insert a provision into the chapter 13 plan which says that the debtor will continue to pay the student loan out of his or her own pocket, rather than have the chapter 13 trustee pay toward the student loan. This has the important advantage of paying more (usually) toward the student loan than would be paid if the trustee made the payments from the plan.

The authority for paying a student loan “outside the plan” is contained in the bankruptcy law’s section 1322(b)(5). This section permits the maintaining of payments on any debt where the last regularly scheduled payment is due after the final chapter 13 plan payment is due. Section 1322(b) reads as follows:

  • (b) Subject to subsections (a) and (c) of this section, the plan may–
  • (1) designate a class or classes of unsecured claims, as provided in section 1121 of this title, but may not discriminate unfairly against any class so designated; however, such plan may treat claims for a consumer debt of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims;
  • (2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims;
  • (3) provide for the curing or waiving of any default;
  • (4) provide for payments on any unsecured claim to be made concurrently with payments on any secured claim or any other unsecured claim;
  • (5) notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due; ***

Section 1322(b) clearly allows the chapter 13 debtor to continue making student loan payments directly to the creditor, much the same as the debtor would continue paying his mortgage payments. Additionally, this approach ensures that the debtor will not owe any accrued interest to the creditor at the conclusion of the case.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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