What happens to my student loans in Bankruptcy?

When a Debtor files for Bankruptcy the Automatic Stay of 11 U.S.C. 362 goes into effect instantaneously without further action of the Court.  The Automatic Stay is an injunction that is automatically entered by the Court upon the commencement of a Bankruptcy Proceeding.  The Automatic Stay disallows any further collection attempts against you that do not go through the Bankruptcy Court first.  This means that all collection actions must stop including the collection of Student Loans through garnishment, lawsuits, voluntary payments, etc.

In a Chapter 13 Bankruptcy the Automatic stay lasts through the duration of your case.  A Chapter 13 Bankruptcy lasts between 3-5 years. During this time, you are not required to pay on your Student Loan, and you are not able to be sued, garnished, levied, etc. as a result of the delinquency on your student loan.  Most student loans are a non-dischargeable debt. While you are not required to pay on the student loans during the pendency of your case they will continue to accrue interest during the course of the case, and you will owe more upon conclusion of the bankruptcy than you did at the beginning due to the accrued interest.  Often a Chapter 13 buys a Debtor the time necessary to plan to repay the student loans while discharging certain unsecured debt to free up capital to be able to repay Student Loans upon completion of the Chapter 13.  Upon completion, you would reach out to the Student Loan creditor and make arrangements to resume regular payments on the debt.

In a Chapter 7 Bankruptcy the breathing room provided is not as profound as it is in a Chapter 13 Bankruptcy.  This is due to the shorter time period that a Chapter 7 Bankruptcy lasts;  typically between 4 and 6 months.  However, just as in a Chapter 13, the Automatic Stay applies, and the Student Loan creditor must discontinue all collection attempts against you for the duration of the case.  Just the same as a Chapter 13, the Student Loan Debt is non-dischargeable in the Chapter 7.

Upon completion of the Chapter 7, a Debtor would reach out to the Student Loan Creditor to resume making regular monthly payments until the Debt is repaid.    When a Bankruptcy is filed the creditor will often “reset the clock” and will not seek to sue or otherwise negatively impact your finances presuming that you resume making the regular direct principal and interest payments that are required by your lender.

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