Enrollment in an Income Driven Repayment Plan rather than allowing ED to simply place student loans in a capitalizing forbearance during a Chapter 13 plan. We can do that here in Florida by using the Student Loan Management Program (“SLMP”). Someone can come out of bankruptcy with years of IDR (Income Driven Repayment) credit toward forgiveness rather than huge balances owed on student loans.
Taking this one step further are new rules that allow a Chapter 13 bankruptcy plan payment to automatically count as an income driven plan payment. That would allow a consumer to use high medical, mortgage, rent or child care costs when determining a student loan payment amount. Basically, the holy grail next to a full discharge! This is stalled by the SAVE injunctions and we don’t know yet whether it will take effect or not. It does offer simplicity and court guardrails which is good. It would require little to no effort by the Department of Education – all features that are good in a Trump administration.
Second, an adversary proceeding can be filed to utilize the Attestation process/guidance for those with Direct federal Student loans. The nice thing about this process is that it is streamlined, relatively simple, and allows for multiple presumptions of discharge including:
- 65 years of age or older;
- Disability or injury impacting income potential;
- Unemployment five of the past 10 years; and
- No degree obtained
It is important for best results to ensure a borrower has a Direct Loan, and has been in repayment status for ten years (including economic forbearance and deferment) before filing the bankruptcy. Exempt equity in a home is reportedly a hurdle whereby ED may deny relief even though the Guidance suggests that liquidating a primary residence is an extreme measure and should be exceptionally rare.
We also have the ability to file an adversary proceeding to discharge non-qualified education debt owed to private lenders. This can include vocational debt, debt owed for attendance at non Title IV schools, debt incurred by someone not in a dependent role (friend, aunt, sister etc.), debt outside of the cost of attendance etc.
The SLMP can also be used to request a mediation – for those with unaffordable payment plans for private student loans, a more reasonable arrangement can be discussed with an agreed upon reduction in principal, lower interest rates or longer terms.
For private student loan debt that survives a full discharge, settlements at one to two percent interest rates over a 20 year term is very possible in bankruptcy.
Protection of a co-debtor (credit report and collections) by virtue of the Chapter 13 automatic stay also happens in a Chapter 13 bankruptcy. You can’t get that outside of a court action.
Objections to proof of claims in a Chapter 13 on the basis of amounts claimed, ownership of the debt, non-qualified nature of the student loan, statute of limitations. All possible in a bankruptcy setting.
Finally, any debt that is discharged in a bankruptcy is tax free forgiveness – the importance of this will be much more apparent now since the American Rescue Plan Act of 2021 expires December 31, 2025.
For the next few years, the relief potentially available in a bankruptcy setting for those with private or federal student debt may easily surpass non-bankruptcy solutions.