Bankruptcy expert Leon Bayer answers real-life questions.
Dear Leon: I received a discharge in a Chapter 7 bankruptcy in 2009 (three years ago). I have a large delinquent private student loan – the outstanding balance is $44,000. The student loan holder will settle only if (1) I agree to allow it to enter a judgment against me, or (2) I agree to high payments, which, quite frankly, I can’t afford.
Can I file a Chapter 13 bankruptcy and get into a better payment plan? Would this reduce or stop the interest from accruing? If this will work, how long will the Chapter 13 plan allow me to repay the debt?
Thank you in advance for your assistance.
Dealing with student loan debt is tough because there is rarely a perfect remedy. To begin with, I am going to assume that an “undue hardship discharge” of your student loan is not an option. (To learn more about discharging student loans in bankruptcy because of undue hardship, see Nolo’s article Student Loan Debt in Bankruptcy.)
Paying Student Loan Debt Through Your Chapter 13 Plan
If you are eligible for Chapter 13 bankruptcy and can confirm a Chapter 13 plan, you can manage any type of student loan, whether private or public, through the plan for up to five years. (To learn how a Chapter 13 plan works, see Nolo’s Chapter 13 Repayment Plan area.)
Your Student Loan Will Not Be Discharged and Interest Will Accrue
However, you cannot discharge (wipe out) the student loan debt, so if you cannot pay it in full during your Chapter 13 case, the remaining balance will remain when your case is over.
In addition, in your case, because you received a Chapter 7 discharge less than four years ago, none of your debts would be discharged at the end of your Chapter 13 case. (To learn more, see Multiple Bankruptcy Filings.)
If a debt is not dischargeable in bankruptcy, the interest owed on the debt will continue to accrue during the bankruptcy.
Advantages of Using Chapter 13 to Repay Your Student Loan
I do think filing for Chapter 13 bankruptcy may offer some advantages in your situation. Some or all of these might not apply to every situation, so you should seek advice from an experienced bankruptcy attorney before you decide what to do.
- With Chapter 13, your monthly payments (which you make for up to five years) may be much less than those the creditor is demanding. At the same time, you’ll get temporary relief from aggressive debt collection for the duration of the Chapter 13 case.
- After you file for bankruptcy, you might be able to reach a better agreement with the creditor than what it previously offered. This is because, when faced with the prospect of small payments for the next five years, your student loan creditor might prefer to rehabilitate the debt and restore it to normal monthly payments.
- Filing a Chapter 13 bankruptcy can give you the time and peace of mind to improve your finances.
- After you complete your case, some lenders may be willing to rehabilitate the loan and restore the normal contractual payment.
- Even if nothing better is accomplished, you have bought up to five years of peace of mind before everything “hits the fan” again.
I hope this insight is helpful.
Guest blogger Leon Bayer practices bankruptcy law in Los Angeles, California. He is a partner at Bayer, Wishman & Leotta.
The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo. By answering a question on this blog, Mr. Bayer does not become your lawyer.