Bankruptcy and Student Loans: What Do You Need to Know?

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  • Bankruptcy and Student Loans: What Do You Need to Know?
Author: Joseph Reinke, CFA

Student loans are in the news a lot these days. The new administration is weighing options for expanding loan forgiveness programs and even forgiving $10,000 of student loans outright.

There have been a few articles recently about bankruptcy and student loans recently. In this article we discuss what you need to know about student loans and bankruptcy.

Student Loans Cannot Be Discharged in Chapter 7 Bankruptcy

Filing bankruptcy under Chapter 7 of the bankruptcy code will not discharge your student loan obligations. However, Chapter 7 offers other benefits that may alleviate your debt situation and make your student loan payments more affordable.

First, once you file Chapter 7, all creditor action against you stops, including but not limited to debt collection calls and letters, debt collection lawsuits, repossessions, and foreclosures. This puts your financial situation on pause and allows you some time to regroup. The Chapter 7 process takes 4-6 months.

Second, you can get most types of unsecured debt discharged in Chapter 7 bankruptcy. “Discharge” means you are no longer responsible for paying that debt back. Debt that is discharged includes credit card debt, medical bills, personal loans, and some past-due income taxes. Debt that will not be discharged are student loans, government fines or fees, sales taxes, and past-due spousal and child support payments.

Student Loans Are Rarely Discharged in Chapter 13 Bankruptcy

Chapter 13 bankruptcy involves a three- or five-year repayment plan. It allows you to catch up with payments, such as past-due payments on:

  • Student loan payments
  • Support payments
  • Mortgage payments
  • Sales tax
  • Government fines or fees
  • Car loan or lease payments
  • Any other payments of secured debt.

At the end of the repayment plan, any unpaid unsecured debt is discharged. Student loans are considered unsecured debt.

Therefore, it is possible, although rare, for student loan debt to be discharged in Chapter 13. You must file a separate action within your bankruptcy case, known as an “adversary proceeding,” requesting that the bankruptcy court find that repayment would impose “undue hardship” on you and your dependents. This is a very difficult burden to meet for most.

Student Loans Can Be Reorganized

Chapter 13 can help you repay past-due student loan payments, and once your payments are caught up, your lender will recalculate your monthly payment based on how much you still owe.

What To Do If You are Temporarily Unable to Repay Your Student Loans

When the pause on student loan payments ends in September, there undoubtedly will be many borrowers who will be unable to resume payments. If you are among them, know that you have options.

Student Loan Deferment

Deferment is a temporary postponement of student loan payments during which interest generally does not accrue on Direct Subsidized Loans, the subsidized portion of Direct Consolidation Loans, Subsidized Federal Stafford Loans, the subsidized portion of FFEL Consolidation Loans, and Federal Perkins Loans.

All other types of federal student loans that are deferred will continue to accrue interest. Any unpaid interest that accrued during the deferment period may be added to the principal balance (capitalized) of the loan(s).

Student Loan Forbearance

Forbearance is a period during which your monthly student loan payments are temporarily suspended or reduced. Your lender or servicer may grant you a forbearance if you are willing but unable to make student loan payments due to financial hardship.

During forbearance, principal payments on the student loan are postponed but interest continues to accrue. Unpaid interest that accrues during the forbearance will be added to the principal balance (capitalized) of your loan(s), increasing the total amount you owe.

Stay in Touch with Your Student Loan Lender or Servicer

Due to the federal government’s as-yet-unknown responses to current economic conditions, there may be other options available to you if you are struggling to pay your student loans. Stay in contact with your lender or servicer, who will keep you informed as to developments in student loan deferment, forbearance, and forgiveness.

Other Resources:

Trump Administration Debating Bankruptcy and Student Loans

Refinancing Student Loans: The Ultimate Guide By FitBUX

How To Refinance Your Student Loans

About the Author

Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy bankruptcy lawyer Abington, PA. The views and opinions expressed in this article are those of Veronica Baxter and not of FitBUX.

Joseph Reinke, CFA

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About the Author

Joseph Reinke is a Chartered Financial Analyst (CFA) Charter Holder and founder of FitBUX which has helped over 14,000 young professionals on their journey to financial freedom. Joseph has been personally investing since he was 12 years old.

In addition, he has experience in student loans, mortgages, wealth management, investment banking, valuation, stock trading, and option trading. He has been on 100s of podcast and has been invited to 100s of universities to discuss financial planning with their soon to be graduates.

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