Chapter 13 Bankruptcy: Force the Lender into a Court-Ordered Payment Plan
Chapter 13 Bankruptcy and Student Loan Debt: A Way Out
Student loans are not generally dischargeable in bankruptcy. In order to discharge student loans in Chapter 7 or Chapter 13 bankruptcy, an adversary lawsuit must be filed within the bankruptcy process to have them declared by the judge in your bankruptcy case to be discharged on a basis of "undue hardship." Through prior court decisions, the definition of "undue hardship" has been set at a very high level, and such declarations are difficult (though not impossible) to obtain. For most people who are not permanently physically disabled, student loans are not going to be discharged through bankruptcy, therefore. But that doesn't mean that bankruptcy does not offer a means of dealing with out-of-control student loan collections. The key component of the bankruptcy process useful in dealing with student loans (and any other) collections is called the "automatic stay against collections." The automatic stay is an injunction under Federal law (bankruptcy is a Federal legal process) that stops all collections of all sorts with very few exceptions for the duration of the bankruptcy case. It clicks into place the moment a Chapter 7 or Chapter 13 bankruptcy petition is filed. It will stop all student loans collections efforts regardless of the fact that, short of an adversary lawsuit declaring the loan to be discharged, the student loans will not be discharged. So the mere filing of a bankruptcy petition will buy you some peace and quiet, but for how long? In a Chapter 7 bankruptcy, only about 4 months. In a Chapter 13 bankruptcy, as long as 5 years. Thus, Chapter 7 bankruptcy is not very useful for dealing with student loan debt. Not only does it not keep the creditors stayed for more than a few months, it provides no options for actually repaying or paying down the student loan debt that is the root of the problem.
Chapter 13 Bankruptcy and Student Loan Debt: Paying the Debt Down while Holding off Collectors
A Chapter 13 bankruptcy, on the other hand, although it will not "discharge" non-dischargeable student loan debt any more than a Chapter 7 will, can manage the eventual pay-down of the debt balance. First, it is essential that you understand how the Chapter 13 bankruptcy process actually works. Read the articles linked to below, and then return here to continue.
Students loans, although non-dischargeable unless a judge says otherwise, are treated in a Chapter 13 bankruptcy plan as non-priority unsecured debt. That is, last to be paid, right along with credit cards, medical debt, and so on. Thus, in a typical Chapter 13 plan, student loan debts receive no payments for the length of the 3-5 year plan, while interest continues to accrue for the 3-5 years, potentially leaving, if your monthly Chapter 13 plan payment is very small and you have much other debt, a larger student loan balance at the end of the Chapter 13 that is higher than it was when the Chapter 13 was begun. So why, then, is Chapter 13 useful in this situation? First, the Chapter 13 will discharge or pay off all of the other unsecured debt the bankruptcy filer has, leaving the filer better able to make those student loan payments after the bankruptcy. Second, private student loan lenders in particular have become increasingly stubborn when it comes to offering work-out plans for former students unable to make their monthly payments. A Chapter 13 can offer one thing that the loan lenders often will not: time. Time to find a new job, time to discharge other debt as noted above, time to pare down living-expenses, time to get back on your feet. A Chapter 13 and its lengthier protection via the bankruptcy "automatic stay" against collections can be a 3-5 year "breather" from onerous monthly payments. Third, there is a pay-off at the end of the Chapter 13: whatever the other unsecured creditors get, the student loan creditors will get as well. If the loan debt is the majority of your debt, the Chapter 13 plan may indeed pay over and above the accruing interest on the balance. Finally, and most importantly, you can file a Chapter 13 even if you are not entitled to a discharge of any debt at all because you have filed a prior Chapter 7 or Chapter 13 bankruptcy within too soon a timeframe prior to the new case. Although you will not get the discharge of the non-student loan unsecured debt that is not fully repaid through the plan (i.e., after the Chapter 13, you'll have to continue paying any remaining balance), the Chapter 13 payment plan still works the same way. Thus, you can, for instance, file a Chapter 7 before a Chapter 13, discharge the non-student loan credit card and other debt, then, if you still cannot manage the student loan debt that was not discharged, file a subsequent Chapter 13 which will force the lender to accept only what you can afford to pay after necessary household expenses are taken into consideration each month and which, since you now have no other debt, will actually begin to pay down the student loan balance. Conceivably, you could thereafter file a second Chapter 13, then a third, and so on. It is possible to shelter yourself from student loan collections harassment for significant number of years if need be, until the balance is finally and actually repaid. All while keeping food on your table, gas in your car, and clothes on your back, which are certainly things that the collection agencies hired by student loan lenders do not care about. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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