Treating Student Loan Claims in a Chapter 13 Plan

Given that so many people have student loan debts these days, I’ve been meaning to write something about this topical issue. And particularly, I wanted to write about how student loans are treated in Chapter 13 here in Western PA.

Quickly, here’s a review: in Western Pennsylvania, we have a conduit trusteeship that requires secured loans to be repaid inside the Chapter 13 plan. So, mortgages (and their arrears) and car loans will be paid first. Then, the Trustee pays priority debts, the most common of which is income tax debt.

Finally, if you have the ability to pay, then your plan will pay some dividend to the unsecured creditors. So, the unsecured creditors might be credit card debts, medical bills, personal loans and student loans.

The big distinction with student loans though is that all other unsecured debts are wiped out (discharged) at the end of the Chapter 13 plan. Student loans not only survive the Chapter 13, but also accrue interest.

The challenge then is to avoid having a student loan time bomb occur at the end of your Chapter 13 plan. I recently talked with a friend who had told me that he borrowed $70,000 about 10 years ago to go to school. He deferred his loans for a few years, then lost his job, and went back to school. Now, his $70,000 loans have ballooned to $180,000!

Thus, if you have any ability to pay whatsoever, you’ll want to look into “special classification” of your student loan debts. Now, unfortunately, our Trustee will fight you tooth and nail if you attempt to pay more to your student loan debts than your other unsecured creditors.

But, the “special classification” is your best shot at having a monthly payment be applied to the student loan claims while you are in the Chapter 13. This is much better than having the Trustee pay the student loans at the end of the case like it does with other unsecured creditors. Again, it is very unfortunate, but the law says that the student loan company can still apply interest to the student loan debt, even while in bankruptcy. I don’t like this case law, but the law has been established.

Here’s an example: if your Chapter 13 plan seeks to repay unsecured creditors at 40%, then why not specially classify (pay on a monthly basis) your student loans throughout the case? Thus, you propose a Chapter 13 plan that pays, for example, $125 a month to your student loan during the course of the case. Then after your Chapter 13 plan has been completed (after 3, 4 or 5 years), then you resume making your regular mortgage and student loan payments.

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