Student Loans in Bankruptcy

In a recent case, as a Fort Lauderdale bankruptcy attorney, I attempted to obtain special treatment for student loans  in a chapter 13 bankruptcy.  The problem is that student loan debt cannot be eliminated in bankruptcy, except for undue hardship.  (The standard is so tough that this would rarely apply)

A chapter 13 bankruptcy can help the student loan borrower.  During the chapter13 bankruptcy the debtor would make a monthly payment to the bankruptcy trustee,  usually from three to five years.  During that time the debtor is not subject to collection from the student loan creditor.   The student loan creditor receives a portion of the monthly payment to the trustee.  At the end of the chapter 13 case, credit card and other unsecured debt is discharged, except the remaining balance on the student loan is still owed.

The problem with the student loans is that interest, late charges, collection costs and penalties continue to accrue.  Collection costs can be 25% of the debt.   The debtor could owe more money on the student loan at the end of the bankruptcy than was owed prior to filing.   A way around this is to provide in the chapter 13 plan to separately pay the student loans the regular payment, and the credit cards will divide up the rest of the payments.  The problem is that the separate payment  is viewed as unfair discrimination against the other creditors.  Case law accross the country differs, but most cases do not permit separate classification.

We attempted to separately classify student loan debt in the Ft Lauderdale bankruptcy division of the United States Bankruptcy Court in  In re Harding, 425 BR 568 (Bankr. S.D. FL  Feb. 8, 2010).  In a good news- bad news decision,   Judge Olson ruled that the debtor could not separately classify the student loans under the facts of the case and that interest would continue to accrue,  but that collection costs, late charges, and penalties cannot be assessed as a result of the chapter 13. (Note the court previously has permitted separate classification of a medical loan, because a Florida statute would have endangered the medical license which would have prevented the practioner from working if there was a default on the student loan.)

But this is not the end of the story.  Separate classification might still work in the appropriate case.  If the bankruptcy means test requires the debtor to pay at least $400.00 per month, for example, and if the student loan payment is $175.00 per month, a plan might be approved  with separate classification if a total of $575.00 per month is paid. (For an explanation of the means test, see my website.)  However, this might not be possible based in part on the Supreme Court decision from last week, Hamilton v Lanning. (This is not a student loan case, but affects how the means test is applied in a chapter 13).



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