If you have done any research on the treatment of student loans in bankruptcy, then you already know that in most cases you cannot eliminate this type of debt and will have to pay back your loans notwithstanding the filing of your case. So when are you supposed to resume making your payments? That is a very good question and one that few people can answer clearly. In fact, if you have been doing your research on the Internet, you may have come across many articles that provide vague answers to this question, without any specifics. In this blog, I will explain exactly how student loans are treated in bankruptcy and when you must resume making your payments after you file.
When Do I Have to Start Paying Student Loans After Bankruptcy?
As explaining in the debt treatment section our knowledge center, on the page discussing treatment student loans in bankruptcy, in most cases you will not be able to discharge (eliminate) your educational loans in bankruptcy. In fact, for the great majority of bankruptcy filers, educational loans are a financial obligation that will remain after bankruptcy and notwithstanding your discharge entered by the Court upon the completion of your case. The question becomes, then: when do you have to start paying your student loans after bankruptcy? The answer is that you don’t have to make payments while you are in an active case. As soon as you receive your discharge, which generally marks the end of your case, you must resume making your payments. Be sure to make your payments to the right company. Frequently, when you file bankruptcy your loans will be transferred to the guarantor of the loan and a new loan servicer.
Repayment Obligation Commences at Discharge
In both Chapter 7 and Chapter 13 cases, your obligation to resume making your student loan payments commences upon receiving a discharge. To explain further, upon the filing of your bankruptcy, an automatic bankruptcy stay goes into effect by operation of law that stops most types of collection activity against you. This includes collection of student loan debt. Therefore, upon the filing of your case, the automatic stay prevents your student loan creditor from collecting on the student loan obligation. Once you obtain a discharge, the automatic stay terminates and collection can resume.
What About the Discharge Injunction?
Although there is a discharge injunction that prevents collection of dischargeable debts after discharge, the discharge injunction does not prevent the collection of nondischargeable debts. Because educational loans are a type of nondischargeable debt, collection can resume after discharge and is not barred by the discharge injunction.
Payment Outside Plan in Chapter 13
In a Chapter 13 case, student loans are characterized as unsecured debts and are treated just like credit cards, medical bills, and collection accounts. As will other unsecured creditors, your student loan lender will receive a percentage of the amount owed, based on the percentage provided for in your Chapter 13 plan. This percentage can be anywhere from 0% to 100%, and frequently it is 0% or close to zero. Because in most cases, your plan will not pay off all of your student loans, you may want to continue to make your payments while in bankruptcy to avoid the balances from increasing due to interest charges. You could propose to pay the student loans “outside your plan,” meaning pay the lender separately, however the San Diego Chapter 13 trustee’s may object to such a plan as giving unequal (more favorable) treatment to student loan creditors than to other unsecured creditors. Your best option will be to treat student loans just like any other unsecured creditor, and then if you have a little extra money each month you can make student loan payments on your own.
Will My Loans Accrue Interest?
During your bankruptcy case, your loans will continue to accrue interest. Therefore, in most cases it is advisable to continue to make your payments after your case is filed. You don’t have to make payments if you don’t want to (during the pendency of your case), but if you do you will avoid accrual of additional interest charges.
Stopping Interest Chapter 13 Case
In a Chapter 13 bankruptcy case, which lasts anywhere from three to five years, interest ordinarily continues to be added to your student loans. However, your attorney can draft a provision in your Chapter 13 plan providing that loans will not accrue interest during your Chapter 13 case. If nobody objects to your Chapter 13 plan as drafted (and usually nobody will, then your Chapter 13 Plan will be confirmed as you have proposed it and your loans will not accrue interest during your Chapter 13 case.
Transfer of Loan to Guarantor or New Servicer
Be sure to make your payments to the right company. Frequently, when you file bankruptcy your student loans will be transferred to the guarantor of the loan and a new loan servicer. You will usually receive a letter from your student loan servicer notifying you of the transfer and the new servicer and you will want to make sure you are sending your payments to the current holder of the loans.