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Chapter 13 filers owing more on student loans after bankruptcy

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Many of those who file for bankruptcy in Cleveland make too much to file for a standard Chapter 7. Yet this may actually be a blessing in disguise since a Chapter 13 allows filers to keep many of their assets, including their homes. For people in such dire financial circumstances, a Chapter 13 bankruptcy is meant to allow them a fresh financial start while still being able to repay some of their creditors. However, recent cases have brought to light a potential unexpected bump in the road for those looking for the relief that a Chapter 13 provides.

Of all of the debts that can be forgiven through bankruptcy, student loan debt is not one of them. In fact, restrictions placed on those still in the 3-5 year repayment window of a Chapter 13 bankruptcy typically don’t allow them to pay the full monthly payment amount towards their loans. As such, creditors can add late charges and interest to the original loan balance. In many cases, people are often coming out of a Chapter 13 owing more on their student loans than when they went in.

Bankruptcy attorneys and consumer advocates are sounding the cry to lawmakers to close the loophole in federal bankruptcy laws that exempts student loans from bankruptcies, or at least allows people to pay their full payments during bankruptcy. Yet such a ruling could potentially upset those creditors required by law to accept lower payments while a person is under bankruptcy protection. As legislators attempt to work this out, one thing seems certain: with student loan debt recently replacing credit cards as the second largest source of debt amongst Americans, more of these cases are sure to come up.

Anyone with outstanding student loan debt who’s thinking of filing a Chapter 13 bankruptcy may wish to speak with a bankruptcy attorney to determine how this could impact his or her repayment plans.

Source: Wall Street Journal “Student-Loan Straitjacket” Katy Stech, Sep. 30, 2013

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