Student Loans and Chapter 13 Bankruptcy
Student loans are very easy to accumulate and notoriously difficult to pay back. University financial aid offices freely hand out federal loans without regard to the borrower's credit scores and their ability to repay. Some students graduate with more than $25,000 in student loan debt before they have even secured a job.
Many deep in debt students are not aware, however, that student loan payments can be drastically reduced for up to five years if they are included in a Chapter 13 bankruptcy plan. While Chapter 7 is a liquidation plan, Chapter 13 provides for monthly debt payments. Through standard calculations, the debtor's disposable income is figured and a portion of that amount is divided between creditors. Secured debt, like home loans and car loans, must be paid in full by the end of the plan. Those creditors that hold credit card debt, however, usually only get pennies on the dollar.
Most interestingly, in Chapter 13, student loan debt is treated like credit card debt during the term of the payment plan. A student with minimal income and lots of debt may actually be allowed to pay student loan creditors pennies on the dollar while protected under a Chapter 13 plan.
Remember, a Chapter 13 repayment plan lasts only a maximum of five years. While credit card and similar debts will be discharged after the successful completion of the plan, student loan debt typically will not, and it will become due and payable as soon as the plan ends. Nevertheless, five years of greatly reduced payments can be of significant help, and many of those burdened with student loan debt welcome the period of relief, even if it is only temporary.