In a Chapter 13 bankruptcy, can I pay off less than 100% of a student loan & be liable for nothing on the student loan after the 13 discharge? What about interest on the student loan?
Do I have to pay 100% of accrued interest? Thank you
The answer is likely no. Most student loans are NOT dischargeable in bankruptcy. However, strongly urge you to consult a qualified bankruptcy Attorney to help you with this matter.
Jonathan Leventhal, esq.
Leventhal Law Group, P.C.
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No. Student loans are generally not dischargeable and neither is the interest on them. You should consult with a bankruptcy attorney in your area. In some jurisdictions you are not even permitted to continue to make payments on student loans while in a chapter 13 bankruptcy at all. In that instance, all they receive is their proportionate share of the funds available through the plan, and it is not uncommon for them to have the same balance (or sometimes a larger one) at the end of the plan than when it was begun.
Student loans are generally non-dischargeable unless you can pass the Brunner test. It's a rigid test, and keep in mind that you will most likely be unsuccessful in discharging all or part of your student loans, unless the facts in your case are compelling. In deciding whether to file, you definitely want to think about the costs of appeal. By that I mean, if you win in the bankruptcy court, the owner of the loan will appeal the case 100% of the time, and you will have to incur additional attorney's fees to fight the owner in court of appeals. To get an idea as to how tough it is to pass this test, I STRONGLY urge you to read this opinion that just came out TODAY from the Bankruptcy Appellate Panel. It's a light read, but definitely worth your time. You will need to speak with an attorney and discuss the facts of your case. To all the bankruptcy attorneys practicing in the Ninth Circuit, this opinion is a good start in the right direction.
If you have a lot of other debt, filing Chapter 13 bankruptcy may cut down your debt enough to allow you to put a much greater share of your income into paying down your student loan. If you can qualify for Chapter 13 bankruptcy (starting point: a regular income of some type), then upon filing your 13, all collection efforts, such as lawsuits and wage garnishments, must stop by law, including on student loans. Under your Chapter 13 plan, you then calculate what payment you can afford, and make that payment for 3 or 5 years. (Unfortunately, at the end of your Chapter 13 you will get a bill for the interest they had to stop collecting during the bankruptcy.) Hopefully, after that you will be in a better position to resume the full loan payment on the remaining balance. But if you are not, if your student loan payment after completing a Chapter 13 bankruptcy is still too large an expense for a reasonable budget, you can probably file another Chapter 13 bankruptcy immediately after the first one, if you meet all the other requirements to do so. (You can include the accumulated interest from the last bankruptcy in this one.)
I noticed others held out some hope of getting an "Undue Hardship" discharge. The Bankruptcy Code provides that although student loans are normally not dischargeable under either Chapter 7 or Chapter 13, they can in fact be discharged under Section 523(a)(8)(A&B) in cases of "Undue Hardship." Since court precedent definitions and common sense definitions are not always the same, the question then becomes, how are the courts defining "undue hardship?" Bankruptcy judges around the country generally give very few "undue hardship" discharges for student loans. Here in the Atlanta area, they generally want proof that you will probably never be able to pay back your student loan, typically due to permanent medical reasons. Being unable to find an adequately-paying job is not considered "undue hardship" for bankruptcy dischargeability purposes. To make things worse, a motion for "undue hardship" treatment involves some expensive legal work, made significantly even more expensive if you win and the lender appeals.
In closing: If you have not already tried it, you may also be able to get some breathing room by pursuing a student loan "deferment" or "forbearance" through your lender. These typically last from one to three years, though a few have longer maximums.. There are many kinds of these- for unemployment, economic hardship, temporary disability, military service, rehab training programs, in-school time, discretionary forbearance for poor health (no maximum), mandatory forbearance for living in a disaster area, etc. The main differences are that a "deferment" normally requires paperwork, whereas forbearance can normally be done by phone; and the government will pay interest on a subsidized loan during a deferment, but will have an interest bill waiting for you after a forbearance. For a lot more information on these, go to www.ombudsman.ed.gov and under the tab "Repay your loans," go to the tab marked "Deferment and Forbearance."
These are complicated areas with many nuances. Be sure to discuss them with an experienced bankruptcy attorney who is used to handling student loans.
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