Under a Chapter 13 bankruptcy, the student loan repayments are included in the Plan, and the Trustee disburses the money.[i] Despite the fact that it is nondischargeable, a student loan is considered a nonpriority unsecured debt, and is included on the bankruptcy schedule for other unsecured debts. It is paid at the same percentage as your other unsecured debts (such as credit cards), which may be less than the agreed monthly payment you previously had with your student loan creditor. Special language can be added to the Plan to prohibit the student loan creditor from charging late fees, collection fees, or other penalties based solely upon the 13 Plan payments being less than the minimum payments it would have otherwise received during the life of the plan. Keep in mind that unless your Plan calls for your unsecured creditors to get 100% of their balances on the date of filing, it is likely that your student loan payments will outlast the bankruptcy. The exception to this may be the case of a below median income debtor, who can propose a Plan where the student loan is paid at 100%.
But what about the situation where you are the debtor who benefited from the student loan, and someone else, probably your parent, cosigned on that loan? If the Chapter 13 plan provides payments to all of your unsecured creditors at a low percentage, and that percentage is less than the contractual monthly payments for your student loans, could the student loan creditor come after your cosigner while you’re in the bankruptcy? That could quite possibly happen. However, a judge in the Columbus division of our bankruptcy court very recently decided in favor of a debtor in that situation.[ii] The debtor was proposing to pay two student loan creditors more than her other unsecured, nonpriority creditors because her mother had cosigned on the student loans. The issue for the judge to decide was whether the plan unfairly discriminated against the other creditors because the student loans were being paid a greater percentage of their debts. He realized that debtors in this situation feel obligated to propose plans that would protect their nondebtor cosigners because 1) the cosigners were usually relatives or friends; 2) the cosigner may have put up collateral for the debt, which might be seized by the student loan creditors; and 3) the cosigner might not be able to make the payments, which would then result in her having to file a bankruptcy. He further reasoned that there would be no purpose in confirming a plan that would not work while the debtor was also making efforts outside the plan to protect the cosigner. Therefore, the judge ruled that a chapter 13 plan may propose to pay cosigned debts the amounts that they would have received if the 13 had not been filed, while paying other creditors less than what they would have received had they been paid their prorata share along with the cosigned debts.
This is a complicated subject, especially in the context of a chapter 13 bankruptcy. However, I hope that what comes through from the above discussion is the idea that bankruptcies can assist debtors in dealing with their student loans, despite the fact that they cannot be discharged. It would be worthwhile to discuss the specifics of your situation with a competent bankruptcy attorney.
[i] Except in situations where the Debtor is actually the co-signer on the student loan, and the payments are being made outside the Plan by the nonfiling party who actually benefited from the student loan.
[ii] In re: Erica Jane Russell, (12/31/13), U.S. Bankruptcy Court for the Southern District of Ohio, Eastern Division at Columbus, unreported. (Hoffman, J.)