The short answer to this question is….yes. Keep in mind the reduced or eliminated payment only applies during the time period you are “in bankruptcy.”
But, for most Chapter 13 filers, this is three to five years– a pretty good chunk of time to catch your breath on student loan payments.
This post assumes you don’t have grounds to discharge your student loans in bankruptcy. Discharging student loans is beyond the scope of this post, but we will be adding information on this topic soon.
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Here’s how Chapter 13 bankruptcy can help with student loans:
- In a Chapter 13 bankruptcy, the court uses a calculation called the Means Test to determine your “monthly disposable income.”
- The calculation basically subtracts your allowable living expenses from your income. This is a greatly simplified explanation; you can learn more about the means test here.
- In many Chapter 13 cases, your “disposable income” is the amount the court wants you to pay to your unsecured creditors each month during your bankruptcy. (The court will want you to pay more each month if you have non-exempt assets; we will ignore that here to keep things simple.)
- For many people, means test disposable income is very low or zero.
- Your trustee divides this “disposable income” payment amount among your unsecured, non-priority creditors.
- Student loans are considered unsecured, non-priority debts in bankruptcy.
- So, your student loan lender only gets paid its pro-rata share from your “disposable income” each month while you are in bankruptcy.
- However, keep in mind that you will still be required to pay your remaining student loans back after your case is closed, assuming your lender files a valid claim in your bankruptcy and you don’t have grounds to discharge your student loans.
- Very important: in a Chapter 13, a co-signer of your student loans is also protected by the bankruptcy automatic stay in most cases.
- This means the lender can’t try to collect from your co-signer while your bankruptcy is ongoing.
- Once the bankruptcy ends, the lender can resume efforts to collect the balance of the loans from your and / or your co-signer.
While it would be great to be able to discharge your student loans in bankruptcy (and sometimes you can), Chapter 13 is the next best thing.
It can buy you 3-5 years of time during which the student loan sharks are forced accept what you can afford to pay.