Student loan debt creates financial stress for many borrowers. While Chapter 13 bankruptcy offers a way to restructure debts, student loans are more difficult to discharge than other types of debt. However, Chapter 13 can provide ways to manage payments and protect borrowers from aggressive collection actions.
The difficulty of discharging student loans
Student loans are not automatically discharged in bankruptcy like credit card debt or medical bills. To have student loans forgiven, a borrower must prove that repayment would cause “undue hardship.” This is a difficult legal standard that requires showing that repaying the debt would prevent maintaining a minimal standard of living, that this hardship is likely to continue, and that the borrower has made a good-faith effort to repay the loans. Courts rarely grant student loan discharges because of this high burden of proof.
How Chapter 13 bankruptcy helps manage student loans
While most borrowers will not be able to eliminate student loan debt in Chapter 13, this type of bankruptcy can help manage payments. Chapter 13 creates a court-approved repayment plan that lasts three to five years. During this time, student loan payments may be included in the plan, allowing borrowers to make manageable payments rather than facing default. Once the repayment plan ends, the borrower must resume full payments, but Chapter 13 provides temporary relief and protection from creditors.
Benefits of Chapter 13 for student loan borrowers
Filing for Chapter 13 stops wage garnishments and collection calls. It also allows borrowers to reorganize their finances, potentially prioritizing other critical expenses. Although interest may continue to accumulate on student loans, borrowers can avoid default and late fees while working toward financial stability. Chapter 13 may also help prevent federal tax refund garnishments or Social Security offsets that can occur when loans remain unpaid.
Navigating student loan debt through Chapter 13 bankruptcy requires careful planning and consideration of all available options. Borrowers facing financial hardship should seek professional guidance to determine the right strategy for their unique situation.
