What about my federal student loans?
There are many people who have federal student loans, and many of those people are behind on their federal student loans. If you are behind by less than 270 days then you are considered “delinquent” on your federal student loans. If you are behind by 270 days or more then you are considered in “default” on your federal student loans.
If you are in default on your federal student loans, you might still be able to get back on track through a loan rehabilitation or default repayment plan. You might also look at the Income Based Repayment Plan (IBRP) which could have a significantly less monthly payment or public service programs which might have loan forgiveness components to them after a certain number of years of work.
What happens to your federal student loans when you file bankruptcy?
Most student loans cannot be discharged in bankruptcy. In general, assume that your federal student loans are not going to be discharged in bankruptcy.
The standard for discharge of federal student loans in bankruptcy is very hard to meet. If the college or university or school you obtained the federal student loan for closed down while you were attending and you never obtained a degree then you might have a reason to seek a discharge of those federal student loans in bankruptcy. You might also have a reason to seek a discharge of federal student loans if you can show that paying those loans off will result in an “undue hardship” to you and your dependents … but the standard for showing an “undue hardship” is extremely difficult to prove, especially if you are young and able to work.
If you file for Chapter 7 or Chapter 13 bankruptcy, your federal student loans go into a forbearance status which generally lasts while the bankruptcy is in effect.
Whether you do a Chapter 7 or a Chapter 13 bankruptcy, interest will continue to accrue on your federal student loans while your bankruptcy is in effect. This means that you could end up owing more on your federal student loans after your bankruptcy is over if you never make any payments (or not sufficient enough payments) while your bankruptcy is in effect.
In a Chapter 13 bankruptcy, you might propose to pay your federal student loans “outside the plan” … meaning that you are responsible for paying your federal student loan lender directly. This can be risky because if you don’t make those payments while your Chapter 13 is ongoing then you will not receive a discharge of any unsecured debts which would have been discharged otherwise. This is a harsh result, but most jurisdictions are holding to this rule based on the idea that you didn’t adhere to your plan in your Chapter 13 if you didn’t make the federal student loan payments outside your plan as you promised you would.
In a Chapter 13 bankruptcy, you might propose to pay your federal student loans “inside the plan” … meaning that part of your monthly payment to your bankruptcy trustee will be used to pay your federal student loan lender(s). This can be risky too because not all jurisdictions will allow you to pay student loans differently than other general unsecured creditors.
In a Chapter 13 bankruptcy, you might decide (or your jurisdiction might demand) that your federal student loans be treated the same as all the other general unsecured creditors. Under this scenario and based on the amount getting paid to general unsecured creditors, federal student loans could be paid anywhere from 0% up to 100%. This too is risky because it means that you might end up owing a lot more on your federal student loans after bankruptcy is over if the amount paid during the plan is less than what the regular monthly payment would have been plus any accruing interest.
What about after bankruptcy?
Once your bankruptcy case is over, you will need to start making your federal student loan payments. If you are unable to make payments you might be able to request a hardship discharge, a deferment, or forbearance directly from the federal student loan lender.
By Errin Stowell, W M Law Attorney
