Although many people were holding out hope for some student loan debt relief, the US Supreme Court recently ruled that President Biden’s plan was unconstitutional. It was not entirely surprising, but it was yet another financial blow to people currently dealing with the struggles of small businesses following Covid 19, high inflation, a failure to increase minimum wages, and general risks that people with minimal incomes and minimal resources often can’t overcome.
In fact, if it wasn’t for the bankruptcy system, things would be much worse for consumers. Bankruptcy provides a periodic outlet to reorganize or eliminate debt and move on past failed businesses, unexpected health crises, divorces, and other causes of financial struggles. Although the bankruptcy system can’t entirely solve the student loan debt crisis, it can help some consumers.
Chapter 7 Liquidations for Student Loan Debt
In Chapter 7 liquidations, debtors can eliminate other unsecured debts (like credit cards, medical bills, personal loans, etc.) and examine whether they should attempt an adversary proceeding (a lawsuit within their bankruptcy) to try to discharge student loans. Although many people have assumed “my student loans can’t be discharged”, that is not always the case. It is a high hurdle but bankruptcy courts will listen to debtors who bring these adversary proceedings.
Even debtors who don’t discharge student loans may be helped by being able to free up money for payments on the loans and getting a brief breather during the pendency of the Chapter 7 case. And debtors with cases where assets are recovered can push the student loan creditors to file claims so they might be paid something.
Chapter 13 Reorganization (and Chapter 11 as well for individuals)
Chapter 13 and individual Chapter 11 cases can allow for a reorganization of debts. However, the actual implementation of the plan is state specific. Some jurisdictions, like Kansas, permit a special classification of student loan debts. This allows some preferential treatment for student loans, since those loans (without an adversary proceeding) wouldn’t otherwise be eliminated.
On the other hand, the Western District of Missouri courts generally frown upon a specifical classification. Under Chapter 13 rules, there can’t be unfair discrimination between creditors. So proposing to pay, say, all unsecured debt payments to student loan creditors or paying 100% to non-student loan claims but paying student loans directly may raise objections. It depends on the amount of student loan and non-student loan debt and other considerations.
For more information on Chapters 7, 11 and 13 in Kansas or Western Missouri, call us at 913-422-0909 to set up an appointment with our experienced attorneys to talk about these bankruptcy options and, the possibility of student loan debt relief within bankruptcy. At W M LAW, we are “Here to Help’.