Yes, Chapter 13 bankruptcy can cover student loans, but only if “undue hardship” can be proven. This makes the question of does Chapter 13 bankruptcy cover student loans complicated. Since they are government guaranteed, student loans are priority unsecured debts for bankruptcy purposes. So, these obligations are dischargeable in some situations. 

Additionally, priority unsecured debts are eligible for inclusion in the protected repayment plan. As outlined below bankruptcy debtors make monthly payments which retire priority unsecured debt delinquency, past-due secured debts, and a few other obligations.

The Student Loan Crisis in the United States

The student loan crisis has been well documented in the media. Many graduates leave school with more debt than they can pay, especially since recent graduates must usually take entry-level jobs. Yet despite the magnitude of this problem, the Eleventh Circuit, which includes Georgia, continues to make it very difficult to discharge student loans in bankruptcy. More on that below as well.

Largely beginning in the run-up to the 2020 elections, many lawmakers started pushing for student loan forgiveness. So far, these efforts have basically gone nowhere. That could be because a student loan forgiveness program is already available.

Debt Discharge in Athens and Georgia

Debt discharge is just one benefit of bankruptcy. Essentially, bankruptcy flips the tables in this area. Outside bankruptcy, creditors call the shots, especially since the Supreme Court has watered down some of the law’s key consumer protections. But when you file bankruptcy, you are able to take control of your own finances.

An Athens bankruptcy lawyer helps debtors make the most of their fresh starts. During the case, an attorney stands up for your legal and financial rights in ways that other professionals cannot. After the case, an Athens bankruptcy lawyer helps families quickly raise their credit scores, so they can put the entire experience behind them.

What to Expect in an Athens and Georgia Bankruptcy Case

In spite of the benefits of bankruptcy, many people are afraid to file, typically because they do not know what to expect. Most people have a healthy fear of the unknown. Furthermore, there are a number of myths about bankruptcy. Therefore, a lack of information is not the only problem. Disinformation is usually an issue as well.

First things first. Most people qualify for Chapter 13 bankruptcy. You must owe less than $400,000 in unsecured debt and less than $1.4 million in secured debt. These amounts, which the government adjusts periodically, include both current and past due obligations. If your family is over the limit, other options could include a Chapter 7 bankruptcy. 

This financial qualification is the same for everyone. So are some other requirements, such as a pair of brief financial management classes. There are some informal qualifications as well, which vary in different jurisdictions.

Filing Documents for Student Loan Oriented Chapter 13 Bankruptcy

Bankruptcy’s legal paperwork is extensive, to say the least. It is much bigger than a tax return. It’s almost like filing tax returns for everyone in the neighborhood. Fortunately, an Athens bankruptcy lawyer streamlines this process. Additionally, when an experienced attorney handles the filing, there is almost no chance that a document will be omitted by mistake. Such omissions usually mean a costly delay at best, and a bankruptcy fraud prosecution at worst.

Normally, pro se debtors must go to the courthouse during business hours and file paper documents. Athens bankruptcy lawyers have unlimited access to the court’s Electronic Case Filing system. For filing purposes, and many other purposes, an attorney’s laptop is the bankruptcy courthouse. It’s open when a lawyer says it’s open.

Bankruptcy Trustee Meeting in Athens and Georgia

About six weeks after debtors file their voluntary Chapter 13 petitions, there is a meeting with the trustee (person who oversees the bankruptcy for the judge). At this meeting, the trustee confirms the debtor’s identity and intentions while examining any possible fraud issues. The trustee also finalizes the monthly debt consolidation payment. This payment combines many obligations into one bill.

Here’s where the aforementioned informal qualifications often come into play. Schedules I and J, which include the debtor’s monthly income and expense breakdowns, are part of the filing package. The trustee reviews all these documents during his/her preparations for the 341 meeting.

Typically, the debtor must show sufficient disposable income to fund the monthly debt consolidation payment. This payment’s size varies significantly, mostly according to the amount of allowed claims. Usually, however, it’s about the size of a mortgage or rent payment.

Normally, these payments continue for three or five years. That’s a long time, and financial circumstances often change. If that happens, an Athens bankruptcy lawyer can help some debtors exit bankruptcy early in some cases. Some possibilities include a hardship discharge, conversion to Chapter 7, and an early payoff. A motion to reduce the plan payment amount might succeed as well.

When the protected repayment period ends, debtors have a zero past-due balance on things like student loans and home mortgages. Additionally, the judge discharges most unsecured debts, such as credit cards and medical bills.

Chapter 13 Bankruptcy Automatic Stay in Athens and GA

During the aforementioned protected repayment plan, Section 362 of the Bankruptcy Code, also called the Automatic Stay, usually shields debtors from adverse creditor actions, such as:

• Creditor Harassment: Student loan lenders are notorious for their itchy trigger fingers in this area. If one payment is late past the grace period, a series of escalating threatening letters start pouring in. Usually, these lenders can legally even send text messages to your phone.
• Collection Lawsuits: Banks which issue student loans already have a number of collection tools. Once they obtain judgements, their toolboxes get bigger. These lawsuits are almost impossible to defend, but they are easy to stop. A simple bankruptcy filing triggers the Automatic Stay.
• Wage Garnishment: This collection method is usually the go-to option for student loan lenders. Usually, these banks don’t need court order to garnish up to 25 percent of your current wages. That amount of garnishment makes it very difficult to pay regular bills, including student loan payments. So, the downward spiral continues.

Other Adverse Actions Covered By the Automatic Stay

Other adverse actions include lien placement, payment intercept, and bank account levy. Student loan companies routinely take these actions against delinquent debtors. As mentioned, there are now fewer constraints on moneylenders. So, they are usually more aggressive than ever.

In most cases, the Automatic Stay keeps debtors from doing all these things until the judge closes the Chapter 13. Moneylenders can only bypass the Automatic Stay in rare instances, especially if the debtor’s obligation is unsecured, like a student loan.

The Automatic Stay not only helps debtors gradually bring delinquent loans current. Section 362 of the Bankruptcy Code also gives Athens bankruptcy lawyers the leverage they need to negotiate more favorable repayment terms.

Chapter 13 Bankruptcy Repayment Terms in Athens and Georgia

Legally, bankruptcy wipes out all loan repayment agreements. Debtors must voluntarily reaffirm them in writing. All repayment terms, especially the interest rate, must be redone. Does Chapter 13 bankruptcy cover student loans in Georgia? Given the current low interest rates, there’s a good chance that an attorney can lower your monthly student loan payments. So, bankruptcy doesn’t just help in the short term. It also provides long-term financial assistance.

Some repayment plans are available outside bankruptcy. But for the most part, these repayment plans are essentially forbearances. The bank allows borrowers to delay payments, but offers no other financial relief. So, when the program ends, most debtors are several months behind and banks demand immediate payment.

Bankruptcy lets debtors repay these obligations on their own terms. Several thousand dollars of delinquency is only a few dollars a month, when these payments are spread out, interest free, over sixty months.

Student Loan Discharge in Chapter 13 Bankruptcy

Before we talk about student loan forgiveness in a Chapter 13, let’s put some events into context.

Vietnam War protests were a big part of the social upheaval of the late 1960s. That change might seemingly have nothing to do with legal and financial matters like bankruptcy, but it does. Allow us to explain.

How Congress Created the Undue Hardship Requirement for Student Loans

Before Congress revised the Bankruptcy Code in the early 1970s, student loans were regular unsecured debts, just like medical bills and credit cards. Therefore, student loans were always dischargeable, unless there was clear evidence of fraud or another serious issue.

Some members of Congress targeted this provision. They believed, correctly or incorrectly, that professional war protestors transferred from school to school in the 1960s for the sole purpose of organizing students. Furthermore, these lawmakers believed that these professional protestors borrowed their way through school, and they had no intention of repaying their loans.

So, the Bankruptcy Code revisions amended the student loan discharge provision by adding a cryptic “undue hardship” requirement. Lawmakers purposely didn’t define this phrase.

The Brunner Rule

About ten years later, the Second Circuit Court of Appeals defined this phrase, in what became known as the Brunner Rule. 

Marie Brunner earned a Master’s degree in social work in 1982. She graduated with about $9,000 in student debt. In the early 1980s, that sum wasn’t an eye-popping amount of money, but it was more than most new social workers could comfortably afford.

Yet the court had little sympathy, mostly because Ms. Brunner almost immediately requested a Chapter 7 discharge. She made no effort to repay the loan or request a forbearance or other relief.

What Is Considered a Hardship in Georgia?

Lawmakers defined an “undue hardship” in very harsh and narrow terms. This doctrine, which the Eleventh Circuit (a circuit that includes Georgia) continues to use, only permits an undue hardship discharge if the debtor:

• Is unable to repay the loan,
• Will be unable to repay the loan well into the future, and
• Has previously made a good faith effort to repay the loan.

So, to obtain a full discharge, an Athens bankruptcy lawyer must essentially show that the debtor has a serious disability which permanently impairs his/her ability to repay the student loan. And, this disability must have occurred after the debtor borrowed the money.

Since student loans are priority unsecured debts, an Athens bankruptcy lawyer must file a separate motion to discharge this obligation. Banks always object to discharge, even if the borrower is clearly eligible for one. This eligibility has expanded recently, at least informally. Some lower courts have taken a more lenient approach. Therefore, debtors in 2021 have a much better chance of obtaining a complete discharge.

Mediation

Furthermore, most judges refer these disputes to mediation. A third party mediator, who is usually a neutral Athens bankruptcy lawyer, reviews the legal paperwork, becoming familiar with the arguments of both sides. Then, on Mediation Day, both sides make brief opening arguments. Then, they retire to separate areas, or even separate rooms. For the rest of the session, which usually lasts a day, the mediator conveys settlement offers and counter-offers back and forth.

All parties have a twofold duty to negotiate in good faith. First, they must earnestly want to resolve the matter. A hardline approach like “it’s my way or the highway” or “s/he doesn’t qualify for discharge” is not a good faith approach. Second, each side must be willing to make some compromises, since that’s what it takes to reach an agreement.

If both sides negotiate in good faith, mediation is about 90 percent successful. Therefore, even if the debtor doesn’t qualify for a full discharge, s/he usually receives a partial discharge. That financial relief, along with the aforementioned debt renegotiation, often lowers student loan payments to the point that they are lower than most monthly utility bills.

Learn More from a Georgia Bankruptcy Lawyer at Morgan & Morgan

Does Chapter 13 bankruptcy cover student loans in Georgia? The answer is yes, if “undue hardship” can be proven. For a free consultation with an experienced Athens bankruptcy lawyer, contact Morgan & Morgan, Attorneys at Law, P.C. The sooner you reach out to us, the sooner we start working for you.