Chapter 13 and Payment of Student Loans Under the Plan

Unless the bankruptcy debtor can satisfy the daunting legal standard of “undue hardship,” student loans are not dischargeable in a bankruptcy case.  However, the mere fact that student loans will not be discharged does not mean you should give up on the bankruptcy process.  For a chapter 13 debtor, the question might be, how should the chapter 13 payment plan propose to treat the student loan debt?

Some attorneys try to distribute more of the debtor’s income to student loan debts than to other debts by simply inserting a provision into the chapter 13 plan which says that the debtor will continue to pay the student loan out of his or her own pocket, rather than have the chapter 13 trustee pay toward the student loan.  This would have the important advantage of paying more (usually) toward the student loan than would be paid if the trustee made the payments from the plan.

The presumptive authority for paying a student loan “outside the plan” is contained in the bankruptcy law’s section 1322(b)(5).  This section permits the maintaining of payments on any debt where the last regularly scheduled payment is due after the final chapter 13 plan payment is due.  Section 1322(b) reads as follows:

(b) Subject to subsections (a) and (c) of this section, the plan may–

  1. designate a class or classes of unsecured claims, as provided in  section 1121 of this title, but may not discriminate unfairly against any class so designated; however, such plan may treat claims for a consumer debt of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims;
  2. modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims;
  3. provide for the curing or waiving of any default;
  4. provide for payments on any unsecured claim to be made concurrently with payments on any secured claim or any other unsecured claim;
  5. notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due;

Section 1322(b) allows the chapter 13 debtor to continue making student loan payments directly to the creditor, much the same as the debtor would continue paying his mortgage payments, assuming that the bankruptcy trustee agrees with this interpretation and the bankruptcy court confirms it.  However, here in Rochester, the Chapter 13 trustee disagrees with this interpretation of the statute and, instead, takes a position that the student loans should be paid pro-rata as other unsecured creditors.  The trustee’s position is based on the argument that making full student loan payments, while in Chapter 13, treats student loan lenders  better than other unsecured creditors and, in fact, does so at their expense.  While Judge Ninfo has not written on this issue, I think that he would agree with the trustee’s position.  Thus, it is critical to discuss these issues with a bankruptcy lawyer prior to the filing.

If you are dealing with debt problems in Rochester, New York; Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy attorney.

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