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If You File Bankruptcy Now You Can Obtain IDR Credit for all Plan Payments!

Christie_1Lots of fighting over student loan forgiveness right now.

One of the big things we were (and still are) looking forward to is a change of law allowing bankruptcy debtors to obtain IDR credit for their plan payments.  Previously, many debtors did not receive such credit because the Department of Education automatically placed student loans in forbearance.  We called that the “False Start” instead of Fresh Start because while a bankruptcy could offer solutions for car loans, foreclosures, and credit card debt, there was not much available for those with student loans.  Instead the balance owed was often much larger after the bankruptcy was over.  That has now changed!!

A new bankruptcy forbearance provision was included as part of a set of regulations that were to implement the SAVE plan.  On June 24, judges in two separate cases involving the SAVE IDR plan, entered preliminary injunctions enjoining some of the regulations from going into effect.

  • Missouri Court:  The Missouri injunction is more limited and temporarily enjoins only forgiveness under the SAVE plan, and so does not enjoin the bankruptcy provision.
  • Kansas Court:  The Kansas injunction is broader.  Even though the plaintiffs in that case did not specifically challenge the bankruptcy forbearance provision, it is part of the final rule provisions that were to go in effect on July 1 and is therefore enjoined by the Kansas injunction.

However, on Sunday, the 10th Circuit stayed the preliminary injunction issued by the Kansas district court pending appeal.

While this means that the July 1 regulation has gone into effect, debtors should get IDR credit on their student loans for any chapter 13 plan payments they make after July 1, there is some uncertainty about how the Department of Education will be implementing the regulations in light of the litigation, and there is always the possibility that the regulations could be enjoined again following the appeal or as the disputes over the injunctions continue.  The IDR credit would be given once the bankruptcy trustee files his or her final report in the case and would apply for any plan payments made regardless of whether the bankruptcy was ultimately discharged or dismissed.

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