UNDERSTANDING BANKRUPTCY: How It Can Help Student Loans

BY MICHAEL A. CIBIK, ESQ., American Bankruptcy Board Certified/ Question: Can bankruptcy help solve your student-loan problem even if the debt is non-dischargeable?

Answer: Chapter 7 can be overlooked as an option for dealing with student loans, particularly if you have assets.

Chapter 13 is the chapter most often chosen for dealing with student-loan cases. A Chapter 13 Plan can last for five years, during which time the automatic stay which prohibits all attempts from student-loan creditors to collect loans from you is in effect and creditors cannot engage in collection activities. This means they cannot send bills or letters, sue, garnish, attach, or take any collection efforts against you during this five-year period.

“Perpetual Chapter 13” is when upon the completion of your Chapter 13, you can turn around and file a brand-new Chapter 13, with a brand-new automatic stay, and another five years, during which time the student-loan creditor cannot call, sue, garnish or attach. This is a very common procedure to deal with student loan debt. We call it a “perpetual Chapter 13,” filing a new case every five years to allow you to survive.

Chapter 11 offers all of the advantages of a Chapter 13 (except for the co-debtor stay) with the addition of being able to extend the repayment term for student loans for up to 20 or 30 years, instead of the maximum of five years that Chapter 13 offers. It also allows people who can’t qualify for a Chapter 13 because of the amount of their debt to protect themselves from student-loan creditors.

What are the disadvantages? Cost, for one. The legal fees for a typical individual Chapter 11 case are much higher than for a Chapter 13. Nevertheless, I have dealt with some very large student loans in individual Chapter 11 cases, and they can be a valuable tool in appropriate cases.

Next Week’s Question: Should you use a debt-settlement company? Be aware! Be very aware!

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