Student loans are not dischargeable under Chapters 7 or 13 (or any other Chapter of the Bankruptcy Code) unless a Debtor can demonstrate that the student loan represents an undue hardship. Proving undue hardship is quite difficult, and requires filing a lawsuit within the bankruptcy proceeding to present evidence to a Bankruptcy Judge that failing to discharge the student loan debt would cause undue hardship to the Debtor.
For a Debtor with student loans who cannot afford to make the payments, Chapter 13 can offer a significant amount of protection. Upon initiating a Chapter 13 case, student loan creditors are prohibited from pursuing collection efforts against a Debtor. Student loan debt is paid the same percentage as the individual’s other unsecured debt. For example, if an individual is paying 15 cents on the dollar to their general unsecured creditors under the terms of a Chapter 13 debt consolidation plan, a student loan creditor would also be paid 15 cents on the dollar while the Debtor remains in Chapter 13. Upon completion of the Chapter 13 Plan, however, the Debtor must make arrangements to re-pay the balance of the student loan, if any amount remains unpaid.
For a Debtor who has been unable to pay their student loans for a significant period of time, an adversary proceeding within a Chapter 7 or Chapter 13 Bankruptcy case can be very powerful. After initiating a Chapter 7 or Chapter 13 case, a Debtor may file an adversary proceeding in the Bankruptcy Court to challenge the dischargeability of student loan debt by claiming undue hardship. Even though the Debtor may not meet the elements of undue hardship (the claim must still be in good faith), the filing of the adversary proceeding may provoke a settlement with a student loan creditor where they may agree to accept a lesser amount in installments over a period of time in satisfaction of the entire amount owed.
Of course, if most of a Debtor’s debt is eliminated through Chapter 7 or Chapter 13 proceedings, a Debtor would have additional disposable income to apply to reduction of a student loan.
NO INFORMATION CONTAINED HEREIN IS INTENDED TO CONSTITUTE LEGAL ADVICE, AND IS NOT APPLICABLE TO ANY SPECIFIC SET OF FACTS, ESPECIALLY AS TO ANY INDIVIDUAL’S PERSONAL SITUATION. THE INFORMATION CONTAINED HEREIN NOR THE PERUSAL OF IT DOES NOT ESTABLISH NOR CONSTITUTE AN ATTORNEY-CLIENT RELATIONSHIP WITH HUNTSMAN LOFGREN & ASSOC. OR ANY OF ITS ATTORNEYS. THE INFORMATION SET FORTH ABOVE IS BASED ON NEW BANKRUPTCY LAWS WHICH BECAME EFFECTIVE OCTOBER 17, 2005 KNOWN AS THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005 (BAPCPA). BECAUSE OF THE COMPLEXITY OF THE NEW LAWS, PLEASE REFER TO THE ACTUAL BANKRUPTCY CODE AND RULES AND/OR CONSULT WITH A BANKRUPTCY PROFESSIONAL TO EVALUATE THE APPLICATION OF THE ABOVE INFORMATION TO YOUR SPECIFIC SITUATION.