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Student loans always seem to have a special status with the law and courts. The same applies to Chapter 13. Student loans can be treated in different ways in most Chapter 13 cases. You may even be able to pay your student loans through Chapter 13.
Student loans are generally classified as “long-term” debt in Chapter 13. This is because most student loan payment schedules will not pay off the loan within 5 years. Chapter 13 is designed to consolidate and pay off all short-term debts only. Short-term debts are generally debts that would pay off within 5-7 years or less.
Because student loan debts are frequently “long-term” debts, they were usually always paid outside of the bankruptcy. They would just be left outside of the Chapter 13 and paid directly to the creditor. You also may be able to get away with not paying your student loans during the Chapter 13 if they are left outside the plan. However, any interest or penalties may add to the balance after your Chapter 13 is completed.
Chapter 13 now has a trend of paying more student loans through the plan. This can be done in three ways. You can potentially be done in three different ways as described in the next 3 sections.
Student loans can be paid as a “pro-rata” unsecured creditor through the Chapter 13. This is the default of Chapter 13 plans: all creditors in such cases are paid the same percentage back. This is usually now allowed with student loans. However, this can cause problems with student loans remaining after the case is completed. If a student loan is only paid 24% back, then the rest of the balance (and possibly some interest and penalties) would remain after the Chapter 13 is concluded. Because student loans are not “dischargeable” in bankruptcy, you would face the rest of the balance after the Chapter 13 discharge.
Some Chapter 13 bankruptcy trustees are now requiring (or allowing) normal student loan payments to be paid through the trustee. Essentially, the trustee would just find out the normal, monthly payment to service the student loan. Then, this amount is paid each month during Chapter 13 to the student loan company from the proceeds of the plan. This is also called a “conduit” payment of student loans because the trustee is being used as a conduit to make the payments. This can be a good option, but it is very similar to simply leaving the payments outside the plan and paying them directly. With this, however, you will only be required to pay one payment to pay all your debts.
You may be able to pay your student loans also in full through Chapter 13 bankruptcy. However, you may need to pay all your creditors 100% of their claims to also pay off the student loan. Or, alternatively, you may need to have a student loan that would pay off naturally within the 5 years of the plan. In some cases, there may be no way to pay off the student loan 100% through bankruptcy at all. This would only be due to the creditor or trustee objecting to the “acceleration” of the loan. A loan is “accelerated” when it is paid off much more quickly (or at different terms) than the original agreement.
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