In the past, debtors filing Chapter 13 bankruptcy were hindered by unimaginative and unwieldy federal rules and policies towards the payment of federal student loans. When a Chapter 13 was filed, the Department of Education would kick debtors out of any income driven repayment plan they’d been on prior to filing bankruptcy. Debtors would lose 3-5 years of repayment of their federal loans, delaying the possible discharge of their loans after a certain number of years, depending on the terms of the income driven program they were on.
Debtors were faced with the difficult choice of trying to get out from under burdensome non-student loan debt versus having years of unpaid interest tacked onto their student loan debt at the end of the Chapter 13 bankruptcy. Since about the year 2018, however, the Department of Education has recognized the usefulness of allowing Chapter 13 debtors to stay on income repayment plans for their student loans even after filing bankruptcy. There may still be limitations on this practice because of local bankruptcy rules and court decisions but at least Chapter 13 debtors don’t have to face opposition from the federal government.
Now, debtors can put language in their Chapter 13 plans that allow them to continue making payments on their federal student loans under one of the many income driven repayment plans. To qualify, debtors cannot be in default on their federal student loans. The student loan payment can be made either by the debtor or the Chapter 13 trustee. The debtor must agree any contacts by the Department of Education won’t violate the bankruptcy automatic stay against the collection of debt. The debtor will need to continue to comply with all rules of the student loan program involving annual certification of income. The U.S. Trustee’s office has developed suggested language that can be used by debtors to insert into their Chapter 13 plans to accomplish this new way of dealing with federal student loans.
With this change in policy Chapter 13 debtors may no longer need to choose between getting out of their federal student loan debt or their other debt.