- Student Loans in Bankruptcy Generally
- Student Loans in Chapter 13 specifically
- President Biden’s Ill-Fated Attempt to Cancel $10,000-$20,000 in Student Loan Debt
- President Biden’s New Student Loan Relief Plan
- If the New Plan Works, How Will it Affect My Chapter 13 Bankruptcy Plan?
- The Bottom Line Regarding Chapter 13 Bankruptcy and Student Loan Forgiveness
The question of how student loans are treated in Chapter 13 bankruptcy is a long and unfortunate tale. Bankruptcy generally has been an imperfect solution to creditor collections for student loan debt. This has been particularly true since Congress enacted the BAPCPA Bankruptcy Code “reform” legislation in 2005, rendering all student loans—public or private—non-dischargeable in bankruptcy except in cases of “undue hardship.”
Meanwhile, the national burden of inescapable student loan debt and the logjam it presents to our economy has become obvious to all outside of a certain political party’s governing representatives.
In response, the Biden Administration attempted this past year to forgive up to $20,000 in student loan debt on a blanket basis. The US Supreme Court, in a highly specious and poorly reasoned decision entirely ignoring the Constitutional requirement that a party filing suit in the US have standing to do so, struck down this student loan forgiveness.
The Biden Administration, now, seeks to enact a one-time “adjustment” to those borrowers in Federal income-driven repayment (IDR) plans. This “adjustment” seeks to right the wrong inflicted on good faith IDR borrowers who were not released from their student loan debt properly after 20 years as agreed or were steered into forbearance and other interest-accruing mechanisms rather than IDRs by self-interested, bad faith student loan servicers contracted by the Department of Education.
How will this work generally? And, if not opposed by random Repub—ahem, a certain party—state governors with no standing whatsoever to oppose, how will this relief affect a borrower’s ongoing, pre-existing Chapter 13 bankruptcy plan?
This Article will attempt to guess, at least, at some of these prospective questions.
Student Loans in Bankruptcy Generally
First, let’s be a little more specific about what happens to your student loan debt in Chapter 7 and Chapter 13 bankruptcy as it stands. And why it isn’t generally dischargeable under current case-law.
We’ll discuss that latter question first.
Student Loans are generally not dischargeable in bankruptcy because, as noted, Congress in 2005 stuck student loans into the list of debts excepted from discharge into the US Bankruptcy Code. The Bankruptcy Code is the Federal statute governing the bankruptcy process in the United States. It “preempts” overrides any state law-based statute or contract from which a debt obligation arises.
This is why bankruptcy works at all, in fact.
However, the Bankruptcy Code itself contains a number of exceptions to its rule that all debt not incurred through fraud is dischargeable. Student loans are one such exception.
The Code does not, further, define the “undue hardship” that can render a student loan dischargeable in Chapter 7 or Chapter 13 bankruptcy. Federal courts have thus taken it upon themselves to provide a definition (the so-called “Brunner Test”). Speciously summed up, this definition amounts to total and permanent disability on top of a stellar prior payment history and every other form of relief—such an IDR—having been attempted first.
It’s a laughable definition that applies to virtually nobody.
Further, because the burden lies on the debtor (that’s you!) to prove undue hardship, procedurally, this means that in order to obtain a discharge of your student loan debt, you must file a lawsuit called an Adversary Proceeding against your student loan creditors within your own bankruptcy case. Remember that attorneys charge hourly for litigation in the vast majority of cases, this is an expensive prospect given that you’re in bankruptcy due to economic hardship to begin with.
Unless you can afford such a lawsuit, your student loans are de facto non-dischargeable, flat out, in Chapter 7 bankruptcy. The 4-month Chapter 7 process will do nothing but stop your student loan creditors from collecting from you during the Chapter 7.
It will not stop late fees or interest from accruing. You will exit a Chapter 7 owing more than you did going in—and will probably find yourself defaulted if you did not “voluntarily” make payments during your Chapter 7 bankruptcy case.
Student Loans in Chapter 13 specifically
But let’s return to Chapter 13 bankruptcy with the understanding, now, that usually student loans are non-dischargeable and that, in order to discharge them, you need to file an Adversary Proceeding lawsuit to get them discharge.
Presuming you don’t do that, what happens to your student loan debt in the longer Chapter 13 bankruptcy process?
A Chapter 13 bankruptcy is a 3-5-year payment plan, essentially. It is a “reorganization” bankruptcy in which you pay a monthly amount for a set number of months (no more than 60) to repay your creditors to the extent you can afford to do so.
That is the case because your monthly plan payment amount is related to the amount of money left over after your household average monthly necessary expenses are deducted from your household monthly average “take-home” pay.
Chapter 13 is a “reorganization” bankruptcy because this monthly payment is not simply divvied up equally among all of your creditors. Rather, certain, priority creditors, such as your mortgage servicer or the IRS, are paid first.
Unsecured creditors such as credit card issuers and medical debt holders are paid last. That is, non-priority, unsecured debt is last to be paid—and it is paid only whatever is left over from your plan payment total after all of the higher priority creditors are paid.
Sounds decent, right? It’s a fact that you find a “debt consolidation” with better terms (0% interest, no creditor harassment, don’t have to pay 100% of what you owe if you can’t afford it) anywhere else.
When it comes to student loan debt, however, Chapter 13 bankruptcy falls nearly as short as does Chapter 7.
This is because student loan debt is treated as non-priority unsecured debt (i.e., last to be paid and maybe not in full) in Chapter 13. This treatment is great for credit card and other unsecured debt. For those types of debts, whatever you don’t pay through your Chapter 13 plan is totally discharged.
For non-dischargeable student loan debt, whatever doesn’t get paid in Chapter 13 simply becomes payable upon completion of your Chapter 13 bankruptcy process—plus accrued interest and late fees. And, after 3-5 years, you’ve definitely been defaulted by your lender or servicer.
President Biden’s Ill-Fated Attempt to Cancel $10,000-$20,000 in Student Loan Debt
Fixing anything about the bankruptcy process itself, at this point, requires a further amendment of the Bankruptcy Code by Congress—and a President willing to sign that bill.
It’s worth remembering that, political parties aside, Joe Biden, as Senator, was one of the primary proponents of the instigators of the 2005 BAPCPA legislation that made all student loans non-dischargeable to begin with.
Nevertheless, giving growing public pressure, now-President Biden, earlier this year attempted to relieve some of the pressure of inescapable student loan debt by cancelling up to $20,000 in student loan debt owed by debtors bearing Federal student loan obligations.
This plan was, Biden argued, justifiable under a statute known as the Higher Education Relief Opportunities for Students Act (the “HEROES Act”). This Act allows the government to offer such relief in response to a national emergency to ensure that the debt held does not worsen due to the emergency. (The emergency being the COVID pandemic.)
A gaggle of rightwing jerks with no standing whatsoever sued to stop this relief—and lost all the way up to the Supreme Court, where another gaggle of rightwing jerks slapped together the most specious and shoddy ruling since Dred Scott in agreement, ruling against the plan—and apparently against the very concept of standing. (This is the basic requirement that, in order to file a lawsuit, you have to have a stake in the outcome personally. Said rightwing gaggle absolutely did not.)
President Biden’s New Student Loan Relief Plan
Not to be dissuaded, President Biden is trying again with a new student loan relief plan.
His new, current plan is both more simple and more complicated than his previous effort, depending on what sort of student loan debt you hold—Federally guaranteed vs. commercial, among other factors—and whether or not you have been in an IDR or denied an IDR opportunity at any time since originating the loans.
The new plan does not rely upon emergency executive powers but, rather, upon authority already granted to the Executive branch by Congress: the power to manage the Federal student loan program itself.
Those IDR plans we keep mentioning? Well, the basic idea was that you would, once approved for entry, pay monthly toward your student loan obligations according to your income (a little like Chapter 13!). Then, once you’d made 20 years’ worth of payments, your remaining balance would be forgiven.
The problem, historically, however, is that the privately contracted servicers (like Nelnet) who managed these IDRs for the Feds “failed” to offer IDRs to debtors in need, instead steering them into interest-accruing measures such as forbearances instead. Further, only a very, very small percentage of those who managed to make 20 years’ worth of payments in their IDRs actually had their balances forgiven.
The new plan aims to repair these injustices with a one-time “adjustment” that will, in fact, wipe out the remaining balances owed by a great many student loan debtors in IDRs and even those not in IDRs. In further cases, the “adjustment” will advance the number of months further into the 20-year IDR indentured servitude period.
Credit toward forgiveness will be granted for:
- Any month in which a borrower was in a repayment status, regardless of whether payments were partial or late, the type of loan, or the repayment plan;
- Any period in which a borrower spent 12 or more consecutive months in forbearance;
- Any month in forbearance for borrowers who spent 36 or more cumulative months in forbearance;
- Any month spent in deferment (except for in-school deferment) prior to 2013; and
- Any month spent in economic hardship or military deferments on or after January 1, 2013.
Information from Ed.gov, here.
Unlike the previous forgiveness plan, this one does not require any application. The Department of Education will simply notify you of your eligibility for relief.
If your student loans are commercially held, it may be possible to consolidate into a Federal loan in order to obtain eligibility for this relief—but you will want to investigate your own particular eligibility requirements by contacting your servicer and the Department of Education to discuss.
Will it work? Will it be challenged?
Of course. The same gaggle of rightwing jerks is already at it again. As of this writing, one lawsuit has already been filed right here in the Eastern District of Michigan Federal Court.
The Department of Education has said that it will defend this new plan aggressively. Unfortunately, the gaggle of rightwing jerks in the US Supreme Court hasn’t gone anywhere, either.
If the New Plan Works, How Will it Affect My Chapter 13 Bankruptcy Plan?
But never mind that. What if it works and you’re already in a Chapter 13 plan with student loan debt? (There are lots of good reasons why you might choose to file Chapter 13 regardless of its ineffectual use with regard to student loan debt … It can save your house from foreclosure, for instance)
If you receive an email from the Department of Education bearing good news of this sort, the short answer is that you need to get in touch with your Michigan bankruptcy attorney immediately.
If student loan debt is the only reason you are in Chapter 13 bankruptcy (to “hide” from collections activity under the umbrella of the bankruptcy “automatic stay against collections” injunction), you may now be able to voluntarily dismiss your Chapter 13 and move on with your life.
If this is not necessarily the case, your Chapter 13 Plan is going to require a modification to one extent or another. This is especially true if you are in a so-called “100% Chapter 13 Plan,” in which you are indeed paying all of what you owe to your creditors.
Just because you owe less debt does not mean that you will pay less in your Chapter 13 (the payment is income/expense-based, not based on your total debt amount, as noted above). But it may mean that your Chapter 13 plan payment term is shortened or that higher priority creditors are paid more, faster.
Or it may simply mean that your other unsecured creditors receive more than they would have if they didn’t have to split that unsecured payment distribution with your student loan servicers.
It is likely that, one way or another, your bankruptcy attorney will need to take some form of action on your behalf.
For example, creditors in Chapter 13 bankruptcy cases are paid only after filing a “proof of claim” form with the Bankruptcy Court. Your student loan servicer is often one of the first to file such a form. It alleges the amount of money owed and purports to name the actual holder of the note (i.e., owner of the obligation), among other details.
Will your student loan servicers withdraw the proof of claim voluntarily and unilaterally? Remembering that they could not and did not even manage your IDR properly all of these years, this is worth doubting.
Your attorney may need to file an objection to the proof of claim to get the matter in front of your judge.
The Bottom Line Regarding Chapter 13 Bankruptcy and Student Loan Forgiveness
The bottom line is that what will happen to your Chapter 13 Plan if your student loans are forgiven (or reduced in number) is a little up in the air.
It is clear, however, that, whatever happens, you will need a bankruptcy attorney who is quickly capable of adapting and reacting—and arguing on your behalf.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented Metro Detroit Chapter 7 and Chapter 13 bankruptcy clients for over 30 years.
If you have student loans and are considering filing for bankruptcy, contact us now to schedule your free consultation.