Bankruptcy

Can Chapter 13 Bankruptcy Help Me Lower My Student Loan Payment?

By Cara O'Neill, Attorney
Filing for Chapter 13 bankruptcy can reduce your student loan payments over three or five years.

Many people with student loan debt are struggling to provide for bare living essentials, finding it impossible to make monthly payments to their student loan lender. If this describes your situation, filing for Chapter 13 will give you temporary relief. A successful filing forces your lender to accept affordable monthly payments over a three- or five-year payment plan. While it isn’t a permanent solution (you will continue to owe on the balance), it might provide you with the relief you need to get your financial life on track. Understand, however, that this solution may not be available for debtors without a steady income stream.

How Chapter 13 Works to Lower Your Payments

Filing for Chapter 13 bankruptcy lowers the monthly payments of nonpriority, unsecured debt. These are debts that are not secured by property and that are paid after “priority” debts, such as taxes and domestic support obligations. Included among such debts are student loans. No matter how much you owe, you’ll have to pay only an amount equal to a sum known as your “discretionary income” (more on that below) during the course of your three- or five-year plan. So, as long as your discretionary income is lower than your current student loan payment, you’ll end up paying less each month over the course of your payment plan.

What Is My Discretionary Income?

Your discretionary income is the amount of money remaining after you pay your household expenses. But there’s a catch: State and federal guidelines determine how much money you need to live—not your actual bills—and what the government believes you need rarely matches your actual lifestyle. It’s often significantly less. You’ll find out the amount of your discretionary income after completing a bankruptcy form called the means test.

For example, suppose that after paying household expenses, you have $50 left at the end of the month. Your means test might indicate that your Chapter 13 payment is closer to $500. The court expects you to live a modest lifestyle, not one that includes a luxury car, a gym membership, and take-out food meals. If these amenities or ones like them are part of your lifestyle, you’ll probably need to make budget cuts before filing Chapter 13.

Chapter 13 Lowers Student Loan Payments—Temporarily

Unlike most debts, student loans are considered long-term debt, meaning that they don’t have to be paid off during your three- or five-year repayment period. So, after finishing your Chapter 13 plan, you’ll still be responsible for the remaining balance.

Example One. Suppose you have $35,000 in student loan debt and $75 in discretionary income each month. With a five-year plan (60 months), you’ll pay $4,500 of your student loan (60 x $75). You’ll be responsible for the balance of $30,500 (plus trustee fees) after completing your plan.

Example Two. If, however, you have a $7,000 student loan balance and $600 in monthly discretionary income, you’ll pay off your loan before the three-year payment plan elapses.

About Three- or Five-Year Payment Plans

Your income determines the length of your plan. For example, if you earn more than the amount set by your state guidelines, your plan will be five years. If your income is less than the guideline amount, you’ll have a three-year plan. In Example Two above, the student loan would be paid off in less than three years. So in that case, assuming no other debt, the plan would be three years regardless of income.

Student Loan Payments Don’t Come First

Your discretionary income won’t necessarily be applied first to your student loan debt, or even cover any of it. That’s because your Chapter 13 repayment plan includes all of your bills, not just student loans, and some debts must be paid before others.

Bankruptcy law requires “priority debt” (such as income taxes or past-due domestic support obligations) to be paid before unsecured debt, like student loans and credit cards. If you have a lot of priority debt, you might not have enough discretionary income left over to pay unsecured debts.

For instance, in Example Two above, if you have past-due child support obligations of $18,000 ($500 x 36 months) only $100 will be left to apply to your student loan debt, and you’ll pay it down by only $3,600 over three years ($100 x 36 months). If your support obligations exceed your discretionary income, you won’t pay down the loan debt at all. Many people do have priority debt as well as unsecured debt, so you’ll need to take this into consideration when you estimate your loan payments.

Don’t think it’s the end of the world if you’re in this situation. It really isn’t so bad. While your student loan balance might not go down very much or at all, you’ll still get a breather because you won’t be paying on it (or will be paying less) while in bankruptcy. Plus, you’ll be paying off your priority debt, which is the stuff that (usually) only goes away if you pay it in full. (See Nondischargeable Debts: Debts That Don’t Get Discharged in Bankruptcy) And, once you complete your plan, your credit card debt, medical bills, and personal loans will be gone for good.

To find out whether Chapter 13 will help with your student loan debt, consult a bankruptcy attorney.

Questions for Your Attorney

  • Will another type of bankruptcy help me get rid of my student loan debt?
  • How will owning significant property increase my Chapter 13 payment?
  • How much will my student loan payment be after I complete my Chapter 13 plan?
  • What happens if unexpected expenses come up and I can’t make my Chapter 13 payment?
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