Friday, March 13, 2015

Dealing With Student Loans In Chapter 13

I recently received the following letter (in pertinent part) from the National Association of Consumer Bankruptcy Attorneys (NACBA):

Following an excellent last with in bankruptcy court with an attorney for the Department of Education, I wanted to let others know that, with huge amounts of assistance and advice from John Rao and NACBA, borrowers are likely soon going to be able to enroll in income driven repayment plans while in a Chapter 13 bankruptcy case.

My case will be, and the Department of Education agrees, the first time where a Chapter 13 Debtor has been allowed to enroll in a IBR. Previously, they have simply refused or ignored requests, depriving Chapter 13 debtors of some very valuable options regarding their student loans.

This will be a huge development and one that will open up many other opportunities for student loan debtors, including starting down the road to obtaining cancellation or, even better, Public Loan Forgiveness while in bankruptcy.

It may also lead to being able to have defaults on student loans waived through bankruptcy, rather than rehabilitating or consolidating loans, with the resulting 18.5% penalty. Just imagine marketing Chapter 13 as a way to help get clients back on track with student loans without taking that hit!

Also, currently there are no real options for curing a default under a income driven repayment plan, meaning that once a problem arises, the borrower may have to start again at square one. Chapter 13, however, allows the cure or waiver of ANY default, including under an IBR.

And, as a practical concern, joining income driven repayment of student loans with Chapter 13 bankruptcy, not only helps deal with the borrower's entire financial situation, but it provides a mechanism for paying attorneys' fees for this assistance. (Attorneys' fees in excess of the regular bankruptcy fees!)

There are very real complications with this, from the specific language to be used, to enrolling borrowers in an IBR, to bankruptcy issues such as separate classification, good faith and feasibility.

And while we believe that these options for debtors are available under the Code and in plan confirmation even over objections raised by the government, we have worked to get the consent of the Department of Education, so as to avoid unnecessary litigation for you in the future. We have also started to discuss these issues with both the UST and Chapter 13 Trustees, who are increasing conscious of the fact that the inability to deal with student loans is impacting bankruptcy filings and are sympathetic to this idea.


  1. Being able to get student loans waived because of filing chapter 13 bankruptcy is interesting. There are things that are good to consider but there are other things that seem like they would be a thing to consider as last result. Student loans sounds like it would be a good thing to consider filing if there is no chance of paying that loan back. Thank you for sharing.

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