It’s challenging to get federal and private student loans erased in bankruptcy. But if you’re overwhelmed with student loans and other debt, you may be able to get some relief through Chapter 13 bankruptcy.
Unlike Chapter 7 bankruptcy, which involves liquidating assets to pay off debts, Chapter 13 allows you to restructure your debts with a new, more manageable payment plan. After three to five years on the plan, many outstanding debts are canceled. However, this may or may not include your student loans.
Even if your student loans don’t disappear, Chapter 13 reorganization could lower your monthly payments for several years and, by eliminating other debt, make it easier to repay them in the future. Because it has a major impact on your credit, however, Chapter 13 should only be used as a last resort.
Here’s a closer look at Chapter 13 bankruptcy and how it can impact your student loan situation.
Understanding Chapter 13 Bankruptcy
Chapter 13 is a type of bankruptcy that restructures your debt. It’s known as a “wage earner’s plan” because it enables borrowers who earn a steady income to develop a plan to repay all or part of their debts.
When you apply for Chapter 13 bankruptcy, you’ll make a list of all your debts, as well as provide information on your income and regular expenses. With the help of a bankruptcy trustee appointed by the court, you’ll come up with a plan for repaying your creditors on a three- or five-year plan. The plan will allocate your disposable income toward your debts on a “pro rata” basis, or proportionally based on what you owe. Chapter 13 repayment plans limit monthly payments to no more than 15% of your disposable income. Disposable income is the income left over after you’ve paid all of your essential expenses. Once you’ve completed the bankruptcy payment plan, the court will discharge the remaining balances of qualifying debts.
Student debt isn’t automatically considered a qualifying debt, though. To get your student loans discharged through Chapter 13 bankruptcy, you need to take an additional step of filing what’s called an “adversary proceeding.” As part of this filing, you must prove to the court that paying back your student loans would be an “undue hardship” for you and your family. While this used to be a highly complicated process, a policy change put into place by the Biden administration in 2022 simplified and condensed the paperwork involved. Student loan borrowers can now fill out a 15-page form that details their financial struggles and makes their case for student loan discharge.
Eligibility Requirements for Chapter 13
To file for Chapter 13 bankruptcy, you must meet the following requirements:
• You have a regular income. You must have enough disposable income to make some payments on your debts. If your income is higher than the local median income, you’ll repay your debt over three years. If it’s below the median, you’ll repay your debt over five years.
• Your debt is under the limit. Your combined debts must total less than $2.75 million.
• You’re up-to-date on income tax filing. You’ll need to submit proof that you filed your federal and state income tax returns for the four tax years before your bankruptcy filing date.
• You’ve received credit counseling. You must have received credit counseling from an approved agency within 180 days before filing for bankruptcy.
Meeting these requirements sets the stage for entering into Chapter 13 bankruptcy and working toward debt reorganization. To get your student loans canceled through bankruptcy, however, there are additional requirements. A bankruptcy court typically must find that:
• You cannot presently maintain a minimal standard of living if you are required to repay the student loan.
• Your financial situation is likely to persist into the future for a significant portion of the loan repayment period.
• You have made good faith efforts in the past to repay the student loan.
Recommended: Strategies to Pay Back Federal Student Loans
How Does a Chapter 13 Bankruptcy Affect Student Loan Payments?
A Chapter 13 bankruptcy can affect student loan payments in the following ways:
• It can reduce your monthly payments. Chapter 13 bankruptcy will base your debt payments on your disposable income. You’ll make payments to your appointed trustee, who will distribute these payments among your various creditors. Depending on the terms of the plan, your student loan payments may go down substantially.
• It may temporarily delay student loan payments. Depending on your disposable income and the terms of your repayment plan, you may not have to pay anything toward student loans for a time during Chapter 13 bankruptcy. That said, interest will keep adding up on your loans, and you may face a greater debt burden when your Chapter 13 plan comes to an end.
• It prohibits student loan collection. During Chapter 13 bankruptcy, an automatic stay will go into effect which prohibits credit collectors or loan servicers from harassing you and trying to collect the debt for up to five years.
• You may be able to get your loans discharged. Filing for Chapter 13 bankruptcy does not in itself guarantee that your student loans will be discharged. But it does allow you to file an adversary proceeding. If you’re able to prove that repaying your student loans would cause extreme hardship, you may be able to get your loans canceled at the end of your repayment plan.
What Takes Place When Your Chapter 13 Case Comes to an End?
A Chapter 13 bankruptcy can eventually discharge some of your debts. But unless you were able to prove to the court that repaying your student loans would be a serious hardship, your federal or private student debt won’t go away. After the plan comes to an end, your lender or loan servicer will set you up on a new payment schedule with a recalculated monthly payment.
If you’ve been able to get rid of your other debts or increase your income over the years, you may be in a better position to afford your student loan payments. You can also explore various options for student loan relief or forgiveness.
An income-driven repayment (IDR) plan, for example, bases your monthly student loan payment amount on your income and family size. Under all IDR plans, any remaining loan balance is forgiven if your federal student loans aren’t fully repaid at the end of the repayment period (either 20 or 25 years).
Thanks to a new rule that went into effect in July 2024, borrowers in an IDR plan can receive credit toward forgiveness for each month of payments under a Chapter 13 plan. This is the case even If the borrower enrolls in an IDR plan during or immediately after the bankruptcy case is closed.
Will You Be Able to Apply for Student Loans in the Future?
Reorganizing your student loans through Chapter 13 bankruptcy should not disqualify you from taking out additional federal student loans in the future. However, you may not qualify for federal student loans or other types of aid if you have any loans in default.
You can get your loans out of default with the Fresh Start program through Sept. 30, 2024. After that, your options are student loan consolidation or rehabilitation to get loans out of default and back into good standing.
Qualifying for a private student loan or student loan refinancing after bankruptcy might be more difficult. Private lenders base their approval decisions on your creditworthiness. Lenders may view applicants with a bankruptcy history as high-risk, leading to higher interest rates or denial of loan applications. Chapter 13 bankruptcy can stay on your credit report for seven years.
You may be able to qualify for a private student loan or student loan refinancing by applying with a creditworthy cosigner, however.
The Takeaway
Filing for bankruptcy doesn’t necessarily mean that your student loans will be discharged. However, Chapter 13 bankruptcy can give you a new, manageable repayment plan for all of your debts, including your student loans, for three or five years. This reorganization might give you some much-needed breathing room if you’re overwhelmed with debt and calls from debt collectors. After this time period, many of your debts (and possibly your student loans) will be canceled.
If Chapter 13 bankruptcy does not result in student loan discharge, however, you’ll have to pay them back after your plan comes to an end. Interest that accrued during the repayment period will also be added to the loan balance, increasing the total amount owed. And keep in mind that filing for Chapter 13 can have a negative impact on your credit that can linger for seven years.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQ
Can chapter 13 bankruptcy help with student loan payments?
Yes, Chapter 13 bankruptcy can reduce your student loan payments for three to five years. The automatic stay issued when you file for Chapter 13 also halts all collection activities, including those for student loans, which can prevent default and other aggressive collection actions during the repayment period.
Filing for Chapter 13 bankruptcy also allows you to file an adversary proceeding. If you’re able to prove that repaying your student loans will result in undue hardship, you may be able to get the loans canceled, along with your other debts, at the end of the repayment period.
Will chapter 13 bankruptcy eliminate my student loan debt?
Not necessarily. Filing for Chapter 13 bankruptcy can get certain debts discharged after you complete a three- or five-year payment plan. In order to get student loans discharged, you need to file a separate action, known as an “adversary proceeding,” requesting the bankruptcy court find that repayment would impose undue hardship on you and your dependents.
What happens to student loan collections during bankruptcy?
If you file for bankruptcy, all collection activities, including those for student loans, will automatically be paused until the case is over or a judge says that payments should restart.
Photo credit: iStock/Maksym Belchenko
SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
SOSL-Q224-1922113-V1